**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 
| **x** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended March 31, 2008**

 

**or**

 
| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**Forthe transition period from              to**

 

**CommissionFile Number 000-50405**

 

**ACUSPHERE,INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **04-3208947**                     |
|------------------------------------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of incorporation  or organization) |       | (IRS Employer  Identification No.) |
|                                                             |       |                               |
| **500  Arsenal Street**                                          |       |                               |
| **Watertown,  Massachusetts**                                    | ** ** | **02472**                          |
| (Address of  principal executive offices)                        |       | (Zip Code)                         |

 

Registrant’sTelephone Number, Including Area Code: **(617)648-8800**

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b 2of the Exchange Act). Yes o  No x

 

As of May 5,2008 there were 46,651,883 shares of the registrant’s common stock, $.01 parvalue per share, outstanding.

 

 

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**ACUSPHERE,INC.**

 

**Form 10-Q**

**For theQuarterly Period Ended March 31, 2008**

 

**CONTENTS**

 
| ** **                                                                                          | **Page  Number** |
|-----------------------------------------------------------------------------------------------------|------------------|
| PART I: FINANCIAL INFORMATION                                                                  |             |
| Item 1. Consolidated Financial Statements                                                           |             |
| Consolidated Balance Sheets:  March 31, 2008 (Unaudited) and December 31, 2007            | 3                |
| Consolidated Statements of Operations (Unaudited):  Three Months ended March 31, 2008 and 2007 | 4                |
| Consolidated Statements of Cash Flows (Unaudited):  Three Months ended March 31, 2008 and 2007 | 5                |
| Notes to Consolidated Financial Statements (Unaudited)                                              | 6                |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 15               |
| Item 3. Quantitative and Qualitative Disclosure about  Market Risk                                  | 28               |
| Item 4. Controls and Procedures                                                                     | 28               |
| PART II:  OTHER INFORMATION                                                                    | 29               |
| Item  1. Legal Proceedings                                                                          | 29               |
| Item 1A. Risk Factors                                                                               | 29               |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                | 44               |
| Item 3. Defaults Upon Senior Securities                                                             | 44               |
| Item 4. Submission of Matters to a Vote of Security  Holders                                        | 44               |
| Item  5. Other Information                                                                          | 44               |
| Item 6. Exhibits                                                                                    | 44               |
| Signature                                                                                           | 46               |

 

2

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**PART I: FINANCIAL INFORMATION**

**ITEM 1. CONSOLIDATED FINANCIALSTATEMENTS**

**ACUSPHERE, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands except share data)**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                           | ** ** | **As of**                | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                           | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                           | ** ** | **(unaudited)**          | ** ** | ** ** | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                                                                                                                                                                                                      |       |                     |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                            |       | $                        | 24,729     |   | $ | 26,102 |   |
| Other current assets                                                                                                                                                                                                                                                                                                                                                                 |       | 1,144                    |       | 1,265 |   |
| Total current assets                                                                                                                                                                                                                                                                                                                                                                 |       | 25,873                   |       | 27,367 |   |
|                                                                                                                                                                                                                                                                                                                                                                                 |       |                     |       |   |   |
| PROPERTY AND EQUIPMENT, at cost:                                                                                                                                                                                                                                                                                                                                                     |       |                     |       |   |   |
| Property and equipment                                                                                                                                                                                                                                                                                                                                                               |       | 54,964                   |       | 54,941 |   |
| Less accumulated depreciation and amortization                                                                                                                                                                                                                                                                                                                                       |       | 34,208                   |       | 31,699 |   |
| Property and equipment, net                                                                                                                                                                                                                                                                                                                                                          |       | 20,756                   |       | 23,242 |   |
|                                                                                                                                                                                                                                                                                                                                                                                 |       |                     |       |   |   |
| OTHER ASSETS                                                                                                                                                                                                                                                                                                                                                                         |       | 1,381                    |       | 1,411 |   |
| TOTAL ASSETS                                                                                                                                                                                                                                                                                                                                                                         |       | $                        | 48,010     |   | $ | 52,020 |   |
|                                                                                                                                                                                                                                                                                                                                                                                 |       |                     |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                                                                        | ** ** | ** **               | ** ** | ** ** | ** ** |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                                                                                                                                 |       |                     |       |   |   |
| Current portion of long-term obligations                                                                                                                                                                                                                                                                                                                                             |       | $                        | 9,664      |   | $ | 8,556 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                                                                                     |       | 5,188                    |       | 3,596 |   |
| Current portion of deferred revenue                                                                                                                                                                                                                                                                                                                                                  |       | 4,750                    |       | 4,667 |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                                     |       | 1,310                    |       | 1,994 |   |
| Dividend payable                                                                                                                                                                                                                                                                                                                                                                     |       | 528                      |       | 0 |   |
| Derivative liability                                                                                                                                                                                                                                                                                                                                                                 |       | 0                        |       | 13 |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                            |       | 21,440                   |       | 18,826 |   |
| LONG-TERM LIABILITIES:                                                                                                                                                                                                                                                                                                                                                               |       |                     |       |   |   |
| Long-term obligations, net of current portion                                                                                                                                                                                                                                                                                                                                        |       | 7,146                    |       | 9,454 |   |
| Deferred revenue, net of current portion                                                                                                                                                                                                                                                                                                                                             |       | 9,250                    |       | — |   |
| Total long-term liabilities                                                                                                                                                                                                                                                                                                                                                          |       | 16,396                   |       | 9,454 |   |
| COMMITMENTS                                                                                                                                                                                                                                                                                                                                                                          |       |                     |       |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                                                                                                                                                                                           |       |                     |       |   |   |
| Preferred stock, $0.01 par value per share                                                                                                                                                                                                                                                                                                                                           |       |                     |       |   |   |
| Authorized -  5,000,000 shares as of March 31, 2008 and December 31, 2007;  Designated 6.5% convertible exchangeable -1,000,000 shares as of  March 31, 2008 and December 31, 2007; issued and outstanding  650,000 shares as of March 31, 2008 and 690,000 shares as of  December 31, 2007 (liquidation value $32,500,000 as of March 31,  2008) |       | 7                        |       | 7 |   |
| Common stock, $0.01 par value per share                                                                                                                                                                                                                                                                                                                                              |       |                     |       |   |   |
| Authorized,  98,500,000 shares as of March 31, 2008 and December 31, 2007;  issued and outstanding 46,620,633 shares as of March 31, 2008 and  46,273,945 as of December 31, 2007                                                                                                                                                                                |       | 466                      |       | 463 |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                           |       | 358,054                  |       | 358,141 |   |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                  |       | (348,353                 | )          | (334,871 | ) |
| Total stockholders’ equity                                                                                                                                                                                                                                                                                                                                                      |       | 10,174                   |       | 23,740 |   |
| TOTAL                                                                                                                                                                                                                                                                                                                                                                                |       | $                        | 48,010     |   | $ | 52,020 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

3

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**ACUSPHERE,INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(unaudited, in thousands)**

 
| ** **                                                     | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                     | ** ** | **March 31,**               | ** ** | **March 31,** | ** ** |
| ** **                                                     | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                                           |       |                             |       |   |   |
| COLLABORATION REVENUE                                          |       | $                                | 667        |   | $ | 667 |   |
|                                                           |       |                             |       |   |   |
| OPERATING EXPENSES:                                            |       |                             |       |   |   |
| Research and development                                       |       | 10,741                           |       | 9,988 |   |
| General and administrative                                     |       | 3,171                            |       | 3,220 |   |
| Total operating expenses                                       |       | 13,912                           |       | 13,208 |   |
|                                                           |       |                             |       |   |   |
| Interest income                                                |       | 184                              |       | 721 |   |
| Interest expense                                               |       | (421                             | )          | (535 | ) |
| Change in valuation of derivative                              |       | —                           |       | (160 | ) |
| NET LOSS                                                       |       |                             | (13,482    | ) |   | (12,515 | ) |
|                                                           |       |                             |       |   |   |
| Dividends on preferred stock                                   |       | (528                             | )          | (593 | ) |
| NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                   |       | $                                | (14,010    | ) | $ | (13,108 | ) |
| NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER  SHARE – |       |                             |       |   |   |
| Basic and diluted                                              |       | $                                | (0.30      | ) | $ | (0.34 | ) |
| WEIGHTED-AVERAGE SHARES OUTSTANDING –                     |       |                             |       |   |   |
| Basic and diluted                                              |       | 46,503                           |       | 38,111 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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** **

**ACUSPHERE,INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(unaudited, in thousands)**

** **
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **March 31,**               | ** ** | **March 31,** | ** ** |
| ** **                                                                   | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                        |       |                             |       |   |   |
| Net loss                                                                     |       | $                                | (13,482    | ) | $ | (12,515 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                             |       |   |   |
| Stock-based compensation expense                                             |       | 425                              |       | 672 |   |
| Depreciation and amortization                                                |       | 2,521                            |       | 2,525 |   |
| Noncash interest expense                                                     |       | 198                              |       | 220 |   |
| Noncash rent expense                                                         |       | (38                              | )          | 13 |   |
| Noncash amortization of deferred revenue                                     |       | (667                             | )          | (667 | ) |
| Noncash amortization of fee and warrants to  financial advisor               |       | 59                               |       | 52 |   |
| Noncash change in valuation of derivative                                    |       | —                           |       | 160 |   |
| Changes in operating assets and liabilities:                                 |       |                             |       |   |   |
| Deferred revenue                                                             |       | 10,000                           |       | — |   |
| Other current assets                                                         |       | 75                               |       | (171 | ) |
| Accounts payable                                                             |       | (685                             | )          | (1,458 | ) |
| Accrued expenses                                                             |       | 1,570                            |       | 115 |   |
| Net cash used in operating activities                                        |       | (24                              | )          | (11,054 | ) |
|                                                                         |       |                             |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                        |       |                             |       |   |   |
| Purchases of property and equipment                                          |       | (35                              | )          | (131 | ) |
| Decrease in other assets                                                     |       | —                           |       | 9 |   |
| Net cash used in investing activities                                        |       | (35                              | )          | (122 | ) |
|                                                                         |       |                             |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                        |       |                             |       |   |   |
| Payments on long-term obligations                                            |       | (1,319                           | )          | (1,203 | ) |
| Proceeds from long-term obligations                                          |       | —                           |       | 554 |   |
| Payment of preferred stock dividends                                         |       | —                           |       | (593 | ) |
| Proceeds from exercise of stock options                                      |       | —                           |       | 35 |   |
| Proceeds from issuance of common stock from employee  stock purchase plan    |       | 5                                |       | 28 |   |
| Net cash used in financing activities                                        |       | (1,314                           | )          | (1,179 | ) |
|                                                                         |       |                             |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                    |       | (1,373                           | )          | (12,355 | ) |
|                                                                         |       |                             |       |   |   |
| CASH AND CASH EQUIVALENTS, Beginning of period                               |       | 26,102                           |       | 59,750 |   |
| CASH AND CASH EQUIVALENTS, End of period                                     |       | $                                | 24,729     |   | $ | 47,395 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

5

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**ACUSPHERE,INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(unaudited)**

 

**1.****     Basis of Presentation**

 

The accompanyingunaudited consolidated financial statements of Acusphere, Inc. andSubsidiaries (the “Company”), have been prepared in accordance with generallyaccepted accounting principles in the United States of America for interimfinancial information and with the instructions to Form 10-Q and Article 10of Regulation S-X. Accordingly, they do not include all of the information andfootnotes required by generally accepted accounting principles in the UnitedStates of America for complete financial statements. These statements should beread in conjunction with the consolidated financial statements and notesthereto included in the Company’s latest audited annual financial statements.Those audited statements are included in our Annual Report on Form 10-Kfor the year ended December 31, 2007, which has been filed with the SEC.

 

Acusphere, Inc.and subsidiaries (“Acusphere” or the “Company”) is a specialty pharmaceuticalcompany that develops new drugs and improved formulations of existing drugsusing its proprietary microparticle technology. The Company is focused ondeveloping proprietary drugs that can offer significant benefits over existingdrugs, including improved safety and efficacy, increased patient compliance,greater ease of use, expanded indications or reduced cost.  The Company’s lead product, ImagifyTM (perflubutane polymer microspheresfor delivery in an injectable suspension, pronounced i-maj’-i-fi, formerlyknown as AI-700) is a cardiovascular drug in Phase 3 clinicaldevelopment for the detection of coronary artery disease, the leading cause ofdeath in the United States.  The Companyalso has demonstrated that its technology has the potential to improve theformulation of hydrophobic drugs and asthma drugs.

 

The Company issubject to a number of risks similar to those of pre-commercial stagecompanies, including dependence on key individuals, uncertainty of productdevelopment and generation of revenues, dependence on outside sources ofcapital, risks associated with clinical trials, dependence on third partycollaborators for research operations, need for regulatory approval ofproducts, successful protection of intellectual property, and competition withlarger, better-capitalized companies.

 

Going ConcernPresentation – As of March 31, 2008, the Company had cash and equivalentsof $24.7 million, current liabilities of $21.4 million and stockholders’ equityof $10.2 million.  During the threemonths ended March 31, 2008, the Company incurred a net loss available tocommon stockholders of $14.0 million. During the three months ended March 31, 2008, operating activitiesused approximately $24,000 of cash, which includes $10.0 million payment for alicense fee received in March 2008. Given the Company’s results from operations, current forecasts, andfinancial position as of March 31, 2008, the Company will requiresignificant additional funds in order to fund operations beyond the thirdquarter of 2008.  These conditions raisesubstantial doubt about the Company’s ability to continue as a goingconcern.  The accompanying financialstatements have been prepared on the basis of a going concern assumption and donot reflect any adjustments that might result from the outcome of thisuncertainty.

 

Management’s Plans– As a result of its limited capital resources, the Company may elect to delaythe funding of certain development activities, which could harm its financialcondition and operating results.  Thedepletion of its resources may make future funding more difficult or expensiveto attain. The Company may raise additional funds through public or privatesales of equity or from borrowings or from strategic partners.  Future capital requirements will depend onmany factors, including the scope and progress made in research and developmentactivities and the size and timing of creating expanded manufacturingcapabilities.  There are no assurances,however, that the Company will obtain additional financing on favorable terms,or at all, or successfully market its products. If the Company is unable to execute its operations according to itsplans or to obtain additional financing, it may be forced to cease operations.

 

Successfulcompletion of the Company’s development program and, ultimately, the attainmentof profitable operations is dependent on future events, including obtainingadequate financing to fulfill its development activities and achieving a levelof revenues adequate to support the Company’s cost structure.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of expenses during the reporting period.Actual results could differ from those estimates or assumptions. The moresignificant estimates reflected in these financial statements relate to revenuerecognition, accrued expenses, embedded derivatives, and valuation ofstock-based compensation.

 

6

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**2.  RevenueRecognition and Deferred Revenue**

 

The Company recognizes revenue from licensearrangements in accordance with Staff Accounting Bulletin No. 104, RevenueRecognition (“SAB 104”) and Financial Accounting Standards Board (“FASB”)Emerging Issue Task Force Issue No. 00-21, Accounting for RevenueArrangements with Multiple Deliverables (“EITF 00-21”). The Company recognizesrevenue from license payments not tied to achieving a specific performancemilestone ratably over the period over which the Company is obligated toperform services. The period over which the Company is obligated to performservices is estimated based on available facts and circumstances.  The Company periodically evaluates theassumptions underlying these estimates; significant changes in theseassumptions could result in an adjustment to the period over which the revenueis recognized. The Company recognizes revenue from performance payments, whensuch performance is substantially in the Company’s control and when the Companybelieves that completion of such performance is reasonably probable, ratablyover the period over which the Company estimates that it will perform suchperformance obligations. Substantive at-risk milestone payments, which arebased on achieving a specific performance milestone when performance of suchmilestone is contingent on performance by others or for which achievement cannot be reasonably estimated or assured, are recognized as revenue when themilestone is achieved and the related payment is due, provided that there is nosubstantial future service obligation associated with the milestone. Revenue inconnection with license arrangements is recognized over the term of thearrangement and is limited to payments collected or due and reasonably assuredof collection. In circumstances where the arrangement includes a refundprovision, the Company defers revenue recognition until the refund condition isno longer applicable unless, in the Company’s judgment, the refundcircumstances are within its operating control and unlikely to occur.  Payments received in advance of beingrecognized as revenue are deferred. Contract amounts which are not due until the customer accepts orverifies the research results are not recognized as revenue until customeracceptance, assuming collectibility is reasonably assured.

 

On March 28,2008, the Company entered into a license agreement with Cephalon, Inc. (“Cephalon”),a related party (Note 10), providing Cephalon with an exclusive, worldwidelicense to the Company’s Hydrophobic Drug Delivery System (HDDS) for oncologyapplications, along with the rights to AI-850, the Company’s formulation ofpaclitaxel, in exchange for a cash payment of $10.0 million, paid upon theexecution of the agreement.  The Companyhas not delivered the technology as of March 31, 2008, and therefore hasrecorded this payment in deferred revenue.

 

In July 2004,the Company entered into a collaboration, license and supply agreement withNycomed in which the Company granted Nycomed rights to develop and marketImagify in Europe.  As of March 31,2008, Nycomed has paid $12.0 million in license fees for the Company’s researchand development efforts, which is being recognized ratably in revenue over thedevelopment period.  Estimation of thisdevelopment period involves the evaluation of many assumptions anduncertainties inherent in the performance of a long term development project.  The Company regularly evaluates theseassumptions and uncertainties and the estimated development recognition periodmay change if facts and circumstances change.  There was no change in theamortization period during the year ended December 31, 2007 or during thethree months ended March 31, 2008. The remaining $2.0 million of the$12.0 million in development payments already received, but yet to berecognized as revenue, is included in deferred revenue at March 31, 2008and will be recognized over the remaining estimated development period.

 

In October 2005and February 2006, the Company and Nycomed amended the collaborationagreement to accelerate $2.0 million in milestone payments in order to fundcertain activities associated with brand development and qualification of acommercial manufacturing facility. The $2.0 million in payments receivedpursuant to these amendments are considered advances against a future milestonepayment for a European regulatory filing, or Marketing AuthorizationApplication (“MAA”). This amount is classified as deferred revenue until theMAA milestone is achieved, provided that the applicable revenue recognitioncriteria are met.

 

**3.****     Stock-basedCompensation**

 

***Accounting for Stock-Based Compensation Plans***

 

Effective January 1, 2006, the Company adopted SFAS No. 123R,*Share-Based Compensation* (“SFAS 123R”)using the modified prospective method, which results in the provisions of SFAS123R being applied to the consolidated financial statements on a going-forwardbasis. SFAS 123R requires companies to recognize stock-based compensationawards granted to its employees as compensation expense on a fair value method.Under the fair value recognition provisions of SFAS 123R, stock-basedcompensation cost is measured at the grant date based on the fair value of theaward and is recognized as expense over the service period, which 

 

7

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generally represents the vesting period. The grant date fair value ofstock options is calculated using the Black-Scholes option-pricing model andthe grant date fair value of restricted stock is based on intrinsic value. Theexpense recognized over the service period is required to include an estimateof the awards that will be forfeited.

 

All stock-basedawards to non-employees are accounted for at their fair value in accordancewith SFAS 123R and Emerging Issues Task Force No. 96-18, *Accounting for Equity Instruments That Are Issued to Other ThanEmployees for Acquiring, or in Conjunction with Selling, Goods or Services*.Under this method, the equity-based instrument was valued at either the fairvalue of the consideration received or the equity instrument issued on the dateof grant. The resulting compensation cost was recognized and charged tooperations over the service period, which was usually the vesting period.

 

Stock compensationexpense under SFAS 123R for the three months ended March 31, 2008 and 2007is as follows (in millions):

 
| ** **                        | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Research & development   |       | $                                                    | 0.2        |   | $ | 0.3 |   |
| General & administrative |       | 0.2                                                  |       | 0.3 |   |
| Total                             |       | $                                                    | 0.4        |   | $ | 0.6 |   |

 

In accordance withSFAS 123R, the Company will report any excess tax benefits from theexercise of non-qualified stock options as financing cash flows.  There were no excess tax benefits recordedfrom the exercise of non-qualified stock options for the three months ended March 31,2008 and 2007.

 

For purposes of recording stock option-based compensation expense asrequired by SFAS 123R, the fair values of each stock option granted underthe Company’s stock option plan for the three months ended March 31, 2008were estimated as of the date of grant using the Black-Scholes option-pricingmodel. The weighted average fair value of all stock option grants issued forthe three months ended March 31, 2008 and 2007 were $0.32 and $1.28,respectively.

 

The fair values of all stock option grants issued were determined usingthe following weighted average assumptions:

** **
| ** **                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Risk-free  interest rate                 |       | 2.7                                                  | %          | 4.8 | % |
| Expected  volatility of underlying stock |       | 60.8                                                 | %          | 50.0 | % |
| Expected life of option grants (years)   |       | 5.0                                                  |       | 5.0 |   |

 

The fair values of options granted during six-monthperiod ended February 28, 2008 and 2007 under the Company’s Purchase Planwere calculated using the following weighted-average assumptions:

 
| ** **                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Risk-free interest rate                  |       | 2.0      | %          | 5.1      | %          |
| Expected volatility of  underlying stock |       | 66.9     | %          | 49.8     | %          |
| Expected life of option (years)          |       | 0.5      |       | 0.5      |       |

 

***Stock Option Activity***

 

During the threemonths ended March 31, 2008, the Company granted stock options to existingemployees, as part of the Company’s performance review process and newemployees and directors. All such options were granted with exercise pricesequal to the current market value of the underlying common stock on the date ofgrant.

 
| ** **                                      | ** ** | ** **         | ** ** | ** **              | ** **   | **Weighted Average** | ** ** | ** **          | ** ** |
|-------------------------------------------------|------------|--------------------|------------|-------------------------|--------------|---------------------------|------------|---------------------|------------|
| ** **                                      | ** ** | **Number of** | ** ** | **Exercise Price** | ** **   | **Exercise Price**   | ** ** | **Grant Date** | ** ** |
| ** **                                      | ** ** | **Shares**         | ** ** | **Per Share**      | ** **   | **Per Share**        | ** ** | **Fair Value** | ** ** |
|                                            |       |               |       |                    |         |                      |       |                |       |
| For the three months ended March 31, 2008: |       | 2,158,971          |       | $                       | 0.56 - $0.68 |                      | $          | 0.59                |       | $ | 690,007 |   |
|                                                 |            |                    |            |                         |              |                           |            |                     |            |  |  |  |

 

8

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On February 28,2008, the company issued 9,591 shares of its common stock under the PurchasePlan at $0.55 per share, reflecting 85% of the closing stock price.

 

Stock optionactivity for the three months ended March 31, 2008:

 
| ** **                                       | ** ** | **Number of  Shares** | ** ** | **Exercise Price  Per Share** | ** **          | **Weighted-  Average  Exercise  Price Per  Share** | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|-----------------------------------------|---------------------|---------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Balance, December 31, 2007                  |       | 4,679,776                  |       | $                                       |  0.63 - $13.02 |                                                    | $          | 4.99                                                 |       |                            |       |   |   |
| Granted                                          |       | 2,158,971                  |       | 0.56 - 0.68                             |                | 0.59                                                    |       |                                                 |       |                            |       |
| Exercised                                        |       | —                     |       | —                                  |                | —                                                  |       |                                                 |       |                            |       |
| Forfeited                                        |       | (344,558                   | )          | 0.57 - 8.50                             |                | 2.74                                                    |       |                                                 |       |                            |       |
| Balance, March 31, 2008                     |       | 6,494,189                  |       | $                                       |  0.55 - $13.02 |                                                    | $          | 3.65                                                 |       | 7.9                             |       | $ | 0.00 |   |
|                                             |       |                       |       |                                    |                |                                                    |       |                                                 |       |                            |       |
| Vested or Expected to  Vest, March 31, 2008 |       | 5,973,841                  |       | $                                       |  0.55 - $13.02 |                                                    | 3.65       |                                                 | 7.9        |                            | $          | 0.00 |   |
| Exercisable, March 31, 2008                 |       | 3,104,298                  |       | 0.55 - 13.02                            |                | 5.64                                                    |       | 6.3                                                  |       | $                               | 0.00       |   |
| Exercisable, March 31, 2007                 |       | 2,323,983                  |       | 0.84 - 13.02                            |                | 6.10                                                    |       | 7.0                                                  |       | $                               | 14,167,688 |   |

 

**4.****     Net Loss Per Common Share**

 

Basic and diluted netloss per common share is calculated by dividing the net loss available tocommon stockholders by the weighted-average number of unrestricted commonshares outstanding during the period. Diluted net loss per common share is thesame as basic net loss per common share, since the effects of potentiallydilutive securities are anti-dilutive for all periods presented. As of March 31,2008 and 2007, anti-dilutive securities, which consist of convertibleexchangeable preferred stock, stock options, warrants, and restricted commonstock that are not included in the diluted net loss per share calculationaggregated 21,040,456 and 16,834,277 shares, respectively.

 

**5.Balance Sheet Data**

 

(in thousands)

 
| ** **                                 | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Other assets consist of the following:     |       |                     |       |                        |       |
| Deposits                                   |       | $                        | 1,126      |                        | $          | 1,126 |   |
| Other assets                               |       | 255                      |       | 285                         |       |
|                                       |       | $                        | 1,381      |                        | $          | 1,411 |   |
|                                       |       |                     |       |                        |       |
| Accrued expenses consist of the following: |       |                     |       |                        |       |
| Accrued contract services                  |       | $                        | 1,461      |                        | $          | 1,404 |   |
| Accrued vacation (1)                       |       | 622                      |       | 517                         |       |
| Accrued bonus                              |       | 360                      |       | 129                         |       |
| Other accrued expenses (2)                 |       | 2,745                    |       | 1,546                       |       |
|                                       |       | $                        | 5,188      |                        | $          | 3,596 |   |

 

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Note (1) –The Company’s current vacation policy allows employees to carry over unusedvacation time as of December 31 of each year, up to a maximum of twoweeks.  However, several employees whojoined the Company prior to the institution of this vacation policy hadaccumulated more than two weeks vacation at December 31, 2007.  These employees had been allowed to carrythis excess vacation accrual forward each year, as their prior accumulatedvacation time was “grandfathered”. Therefore, the accrued vacation balance at March 31, 2008 includedsome of this prior accumulated vacation pay. During April 2008, the Company paid this accumulated vacation payliability as of March 31, 2008 to employees as a lump sum payment.

 

Note (2) –Includes an $0.8 million payable under an intellectual property licenseagreement with Bracco.

 

9

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**6.  Intellectual Property**

 

The Companyexpenses intellectual property costs incurred in obtaining license rights andpatents rights to technology or products for which technological feasibilityhas not been commercially demonstrated and no alternative future use has beenshown to exist.  No amount has been capitalized by the Company relating tothe costs of intellectual property developed or acquired by the Company.

 

On June 1,2006, the Company entered into an agreement to license on a non-exclusive basisvarious ultrasound-related intellectual property from GE Healthcare (“GE”), adivision of General Electric Company. In consideration of the non-exclusivelicense of these patents, the Company agreed to pay GE $10.0 million prior tocommercial approval of Imagify, of which $5.0 million was paid in June 2006and $5.0 million was due in June 2007. Effective May 11, 2007 the Company entered into an amendment (the “Amendment”)to the GE patent license agreement.  The Amendment provides that, in lieuof this $5.0 million payment due on June 1, 2007, the Company agreed tomake a series of payments as follows: $1.5 million was paid in May 2007and six consecutive quarterly installments totaling $5.5 million, of which $0.9million is due on the first day of the third month of each calendar quarter,commencing June 1, 2008.

 

On June 1,2006, the Company entered into an agreement to license on a non-exclusive basisvarious ultrasound-related intellectual property from Bracco International BV (“Bracco”).The agreement provides the Company with use of Bracco’s ultrasound-relatedpatents and patent applications in combination with the Company’s lead productcandidate Imagify in the field of ultrasound diagnostic imaging. The term ofthe agreement extends until expiration of the last of the patents licensedunder the agreement.  In considerationfor the non-exclusive license of these patents, the Company agreed to payBracco up to a total of Euros 3.0million, of which Euros 0.5 million (approximately $0.6 million) waspaid in June 2006. Another payment of Euros 0.5 million (approximately$0.8 million) is payable to Bracco within five business days after acceptanceby FDA of the filing of our NDA for Imagify, which is currently expected in June 2008.  The Company has included this $0.8 millionpayable in current liabilities as of March 31, 2008.  An additional Euros 2.0 million is payableupon the Company’s achievement of certain defined regulatory milestones.  The Company also agreed to pay a royalty onfuture Imagify revenue, up to a maximum royalty amount of Euros 10.0 million,less a portion of the above-referenced milestone payments. The Company has notdemonstrated technological feasibility or an alternative future use for thesepatents, therefore, both of the Euros 0.5 million payments have been expensed.The other obligations have not been recorded since they are contingent upon theoutcome of future events.

 

On May 11,2005, the Company entered into a Patent Transfer Agreement with Bayer ScheringPharma AG (“Schering”) pursuant to which the Company acquired rights, title andinterest in certain ultrasound-related patents from Schering. In considerationof the transfer and assignment of these patents, the Company agreed to paySchering a total of $7.0 million of which $1.0 million was paid in May 2005,$3.0 million was paid in May 2006, and $3.0 million was due in May 2007.  Effective April 27, 2007 the Companyentered into an amendment (the “Amendment”) to the Patent TransferAgreement.  The Amendment provides that, in lieu of this final $3.0million payment due in May 2007, the Company agreed to make a series ofpayments as follows: $1.5 million was paid in May 2007; $1.0 million isdue in May 2008 and $1.0 million is due in May 2009.  The $1.0million payment due in May 2008 has been included in the current portionof long-term obligations at March 31, 2008.

 

**7.Long-term Obligations**

 

The carrying valueof long-term obligations is as follows:

 
| ** **                                         | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
|                                               |       |                         |       |                            |       |
| Capital lease obligations                          |       | $                            | 60         |                            | $          | 67 |   |
| Notes payable                                      |       | 8,717                        |       | 10,029                          |       |
| Amounts due under intellectual property agreements |       | 6,860                        |       | 6,666                           |       |
| subtotal                                           |       | 15,637                       |       | 16,762                          |       |
| Less current maturities                            |       | (9,664                       | )          | (8,556                          | )          |
| Long-term obligations, net                         |       | $                            | 5,973      |                            | $          | 8,206 |   |

 

***Capital Lease Obligations***

 

The Company leasescapital equipment through Banc of America Leasing Corporation. The remainingmonthly payments range from $460 to $1,019 with maturities through June 2010.Interest rates for the above leases range from 7.3% to 9.4%. Acusphere does nothave any additional borrowing availability under these lease arrangements as ofMarch 31, 2008.  At March 31,2008 and December 31, 2007, the cost and net carrying value of equipmentunder capital leases amounted to approximately $60,000 and $67,000.

 

10

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***Notes Payable***

 

***Equipment Promissory Notes—***In 2004 and2005, the Company borrowed an aggregate of $10.5 million against this line. In January 2006,the line was amended and the availability was increased by an additional $3.5million and was extended through May 2007. During the year endedDecember 31, 2007, the Company borrowed approximately $0.9 million, noadditional amounts may be borrowed under this line.  Borrowings are collateralized by equipmentand other capital purchases made with the proceeds from these notes, withrepayment due in monthly installments over 36 to 48 months, depending on thenature of the equipment financed, with the last such repayment scheduled for December 2010. Interest rates on these borrowings werefixed at the time of each borrowing and range from 8.7% to 10.7%. The loansunder this line are subject to acceleration upon certain events of default,including but not limited to: i) the failure to make timely payments ofprincipal and interest, ii) a default on other material obligations, or iii) amaterial adverse change in the financial condition of the borrower.  As of March 31, 2008, net of repayments,the Company had $3.8 million outstandingunder the line.

 

In 2005 theCompany borrowed an aggregate of $7.0 million under an equipment financing linewith Oxford Finance Corporation. As of March 31, 2008, net of repayments,the Company had $2.9 million outstanding under the line. Borrowings arecollateralized by the equipment financed, with repayment due in monthlyinstallments over 36 to 48 months, with the last such repayment scheduledfor March 2010. Interest rates on these borrowings were fixed at the timeof each borrowing and range from 10.3% to 10.9%. The loans under this line aresubject to acceleration upon certain events of default, including but notlimited to the failure to make timely payments of principal and interest, adefault on other material obligations, or a material adverse change in thefinancial condition of the borrower.  Noadditional amount may be borrowed under this line.

 

***Facility Loan Agreement—*** In March 2005the Company borrowed $2.0 million under a loan agreement withMassDevelopment to help finance certain tenant improvements to its commercialmanufacturing facility in Tewksbury, Massachusetts. The loan is secured bycertain improvements made at the facility, interest accrues at 5.0% per annumwith retroactive adjustments to 9.0% in the event the Company achieves positiveoperating cash flow, as defined in the agreement, prior to repayment of theloan. Accrued principal and interest are being repaid over a 10 year term. Theloan is subject to acceleration upon certain customary events of default,including failure to timely pay principal and interest. Acusphere began makingpayments on this loan in May 2007 and as of March 31, 2008, hasapproximately $2.0 million outstanding under the loan, including principal andinterest.

 

The retroactive interest rate adjustment feature of the loan agreementwas deemed to be an embedded derivative instrument requiring separateaccounting under SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, and was initially valued at$62,000. The derivative asset is being amortized as interest expense over aterm beginning with the loan agreement effective date and ending with thecurrently expected payment date of the retroactive interest. The fair value ofthe derivative liability is re-measured at each reporting period, with anychange in value charged or credited to interest expense. There was no change in the estimated fair value of thederivative liability at March 31, 2008.

 

***AmountsDue Under Intellectual Property Agreements***

 

Under the Company’samended Patent Transfer Agreement with Schering, a $1.0 million payment is duein May 2008 and $1.0 million is due in May 2009.  Under the Company’s amended License Agreementwith GE, the Company is scheduled to make six consecutive quarterly payments of$0.9 million due on the first day of the third month of each calendar quarter,commencing on June 1, 2008.  Underthe Company’s Patent License Agreement with Bracco, a payment of Euros 0.5million (approximately $0.8 million) is due within five business days afteracceptance by the FDA of the filing of our NDA for Imagify, which is currentlyexpected to occurred in June 2008.

 

As of March 31,2008, the Company has included $4.5 million in the current portion of long-termobligations, representing payments due under the GE and Schering agreementswithin the next twelve months.

 

**8.Stockholders’ Equity**

 

***Convertible Exchangeable Preferred Stock***

 

On February 24, 2005, the Company issued 900,000 shares of 6.5%convertible exchangeable preferred stock (the “Preferred Stock”) at $50.00 pershare resulting in aggregate gross proceeds to the Company of $45.0 million(net proceeds of approximately $41.9 million after deducting underwritingdiscounts, commissions and offering expenses). Each share of Preferred Stockhas a liquidation preference of $50.00 per share. Dividends on the PreferredStock are cumulative from the date of original issue at the annual rate of$3.25 per share, payable quarterly on the first day of March, June, September,and December. Any dividends must be declared by the 

 

11

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Company’s board of directors and must come from funds that are legallyavailable for dividend payments. As of March 31,2008, dividends accumulated on the Preferred Stock totaled $7.6 million, ofwhich $6.9 million have been paid.

 

In February 2008, the Company’s board of directors did not declarethe quarterly dividend on the preferred stock, payable on March 1, 2008.This dividend, which totaled $0.5 million in the aggregate, has been includedin current liabilities as of March 31, 2008.

 

The PreferredStock is convertible into the Company’s common stock at any time at the optionof the holder at a conversion rate of 7.2886 shares of common stock for eachshare of Preferred Stock, based on an initial conversion price of $6.86 pershare. The initial conversion price is subject to adjustment in certain events,but is not subject to “price based” anti-dilution adjustment. The Company hasreserved approximately 4.7 million shares of common stock for issuance uponsuch conversion.

 

The Company mayelect to automatically convert some or all of the Preferred Stock into sharesof common stock if the closing price of the Company’s common stock has exceeded$10.30 per share (150% of the conversion price) for at least 20 trading daysduring any 30-day trading period, ending within five trading days prior tonotice of automatic conversion. Prior to March 1, 2009, if the Companyelects to automatically convert, or if any holder elects to voluntarilyconvert, the Preferred Stock, the Company will also make an additional payment(“Make-Whole” payment) equal to the aggregate amount of dividends that wouldhave been payable on the Preferred Stock so converted from the original date ofissuance through and including March 1, 2009, less any dividends alreadypaid on the Preferred Stock. This additional payment is payable by the Company,at its option, in cash, in additional shares of its common stock, or in acombination of cash and shares of common stock. The Company has reserved amaximum of approximately 0.4 million shares of common stock for issuance underthis Make-Whole provision.

 

In February 2008,one stockholder voluntarily converted 40,000 shares of preferred stock into291,545 shares of the Company’s common stock. In connection with the conversion, the Company issued an additional27,219 shares of the Company’s common stock in satisfaction of the requiredMake-Whole payment.

 

Through March 31,2008, 250,000 shares of Preferred Stock have been voluntarily converted into1,822,157 shares of the Company’s common stock. In connection with suchconversions, the Company issued an additional 374,822 shares of the Company’scommon stock in satisfaction of the required Make-Whole payment. The fair value of these Make-Whole payments was approximately$1.7 million, which was charged against the derivative liability.

 

In accordance withSFAS No. 133, the Company is required to separate and account for as anembedded derivative, the dividend make-whole payment feature of the PreferredStock offering. As an embedded derivative instrument, the dividend make-wholepayment feature must be measured at fair value and reflected as a liability.Changes in the fair value of the outstanding portion of the derivative arerecognized in earnings as unrealized gain or loss on derivative in thestatement of operations. The Company determined the fair value of the dividendmake-whole payment feature to be $3.1 million at February 24, 2005 (thecommitment date). This amount was allocated from the proceeds of the PreferredStock to the derivative liability. At March 31, 2008, the derivativeliability was valued at $0.

 

The Company mayelect to redeem the Preferred Stock at declining redemption prices on or after March 6,2009.

 

The PreferredStock is exchangeable, in whole but not in part, at the option of the Companyon any dividend payment date for the Company’s 6.5% convertible subordinateddebentures (“Debentures”) at the rate of $50 principal amount of Debentures foreach share of Preferred Stock. The Debentures, if issued, will mature 25 yearsafter the Exchange Date and have terms substantially similar to those of thePreferred Stock.

 

The PreferredStock has no maturity date and no voting rights prior to conversion into commonstock, except under limited circumstances.

 

***Common Stock***

 

As of March 31,2008, there were 98.5 million shares of common stock authorized, 46.6 millionshares of common stock outstanding and 25.2 million shares of common stockreserved for issuances, representing 4.7 million shares reserved for issuancefor in connection with outstanding convertible exchangeable preferred stock,0.4 million shares reserved for issuance in connection with the make-wholepayments provisions of the outstanding convertible exchangeable preferredstock, 9.8 million shares reserved for issuance in connection with outstandingcommon stock warrants, 6.5 million shares reserved for issuance in connectionwith outstanding stock 

 

12

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options, 3.6million shares reserved for issuance, in aggregate, in connection with sharesavailable for future stock or option grants under the 2003 Stock Option Planand Amended 2005 Stock Option Plan and 0.2 million shares reserved for issuanceunder the Employee Stock Purchase Plan.

 

**9.Common Stock Warrants**

 

As of March 31,2008, warrants to purchase shares of the Company’s common stock, theorigination of which were derived in connection with debt and lease financingtransactions, the collaborative agreement with Nycomed and the April 2006,December 2006 and June 2007 common stock offerings, were outstandingfor an aggregate of 9,808,658 shares of common stock at an effective weightedaverage price of $4.82 per shares as follows:

 
| **Number of** | ** ** | **Exercise Price** | ** ** | **Expiration**          | ** ** |
|--------------------|------------|-------------------------|------------|-------------------------|------------|
| **Shares**         | ** ** | **Per Share**      | ** ** | **Date**                | ** ** |
| 450,897            |       | 8.46                    |       | April 11, 2008     |       |
| 684                |       | 14.00                   |       | April 11, 2008     |       |
| 7,540              |       | 8.46                    |       | June 27, 2008      |       |
| 573,105            |       | 8.50                    |       | August 2, 2008     |       |
| 16,212             |       | 19.80                   |       | October 16, 2008   |       |
| 14,934             |       | 19.80                   |       | October 19, 2008   |       |
| 114,895            |       | 8.50                    |       | October 20, 2008   |       |
| 55,732             |       | 6.28                    |       | November 30, 2009  |       |
| 2,688              |       | 19.80                   |       | January 5, 2010    |       |
| 30,844             |       | 28.50                   |       | March 30, 2011     |       |
| 28,138             |       | 28.50                   |       | September 27, 2011 |       |
| 1,731,600          |       | 7.97                    |       | April 12, 2011     |       |
| 3,703,701          |       | 3.11                    |       | December 12, 2011  |       |
| 3,077,688          |       | 3.10                    |       | June 15, 2012      |       |
| 9,808,658          |       | $                       | 4.82       |                    |       |   |
|                    |            |                         |            |                         |            |  |

 

**10. Related Party Transaction**

 

On March 28,2008, the Company entered into a license agreement with Cephalon, Inc. (“Cephalon”)providing Cephalon with an exclusive, worldwide license to the Company’sHydrophobic Drug Delivery System (HDDS) for oncology applications, along withthe rights to AI-850, the Company’s formulation of paclitaxel, in exchange fora cash payment of $10.0 million, paid upon the execution of theagreement.  The term of the agreement extends until expiration of the lastof the patents licensed under the agreement. The Chairman, founder and CEO of Cephalon is also the current PresidingDirector of the Board of Directors of the Company.

 

**11. New Accounting Pronouncements**

 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*, which iseffective for financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. The purpose of SFAS 157 isto clarify and set forth consistent rules for defining fair value,establishing a framework for measuring fair value in generally acceptedaccounting principles and expanding disclosures about fair value measurements. SFAS157 applies under other accounting pronouncements that require or permit fairvalue measurements where those accounting pronouncements have determined thatfair value is the relevant measurement attribute. SFAS 157 does not require anynew fair value measurements, but for some entities the application of SFAS 157could change current practice.  Except asdescribed below, we have adopted SFAS No. 157 on January 1, 2008. Theadoption of SFAS No. 157 did not have a material impact on the Company’sfinancial statements or disclosures.

 

In February 2008, FASB issued FASB FSP FAS 157-2, *Effective Date of FASB Statement No. 157* (FSP 157-2).FSP 157-2 will provide a one-year deferral of the effective date of SFAS No. 157for non-financial assets and non-financial liabilities, except those that arerecognized or disclosed in financial statements at fair value at leastannually. For non-financial assets and non-financial liabilities subject to thedeferral, SFAS No. 157 will be effective in fiscal years beginning after November 15,2008 and in interim periods within those fiscal years. The Company is currentlyevaluating the impact that applying SFAS 157 to nonfinancial assets andliabilities will have on its consolidatedfinancial statements.

 

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In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities,* which is effective as of the beginning of an entity’sfirst fiscal year beginning after November 15, 2007.  This statement allows the measurement at fairvalue of financial instruments and certain other items that are currently notrequired to be measured at fair value. The objective of SFAS 159 is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. The fair value option established by this Statement permits themeasurement of eligible items at fair value at specified election dates, withunrealized gains and losses on the items for which the fair value option hasbeen elected reported in earnings at each subsequent reporting date.  SFAS No. 159 was effective for us in thefirst quarter of 2008. The adoption of SFAS No. 159 did not have an impacton the Company’s financial statements or condition as we did not elect to usefair value measurements on any assets or liabilities under this statement andhave not subsequently elected to carry any assets or liabilities at fair value.

 

In June 2007,the Emerging Issues Task Force issued EITF 07-3, *Accountingfor Nonrefundable Advance Payments for Goods or Services Received for Use inFuture Research and Development Activities*, which is effective as of the beginning of an entity’s firstfiscal year beginning after December 15, 2007.  This abstract discusses the treatment of thenonrefundable portion of advance payments made pursuant to an executorycontractual arrangement for future research and development activities.  Nonrefundable advance payments for goods orservices that will be used or rendered for future research and developmentactivities should be deferred and capitalized. Such amounts should berecognized as an expense as the related goods are delivered or the relatedservices are performed. If an entity does not expect the goods to be deliveredor services to be rendered, the capitalized advance payment should be chargedto expense.  The Company adopted thisstatement as of January 1, 2008 and concluded it has no effect on itsconsolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161, an amendmentof SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities,*which is effective as of the beginning of an entity’s first fiscal yearbeginning after November 15, 2008.  This Statement changes the disclosurerequirements for derivative instruments and hedging activities, requiringenhanced disclosures about (a) how and why an entity uses derivativeinstruments, (b) how derivative instruments and related hedged items areaccounted for under Statement 133 and its related interpretations, and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows.  The Company is assessing the impact, if any,of this pronouncement on its consolidated financial statements.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Statementscontained herein, including without limitation, “Management’s Discussion andAnalysis of Financial Condition and Results of Operation,” contains certainprojections, estimates and other forward-looking statements. “Forward-lookingstatements,” as that term is defined in the Private Securities LitigationReform Act of 1995, are not historical facts and involve a number of risks anduncertainties. Words herein such as “may,” “will,” “should,” “could,” “would,” “expects,”“plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,”“potential,” and similar expressions (as well as other words or expressionsreferencing future events, conditions or circumstances) are intended toidentify forward-looking statements.*

 

*Forward-lookingstatements include, but are not limited to: our plans to develop and market newproducts and the timing of these development programs, in particular our estimatesof the timing of an MAA for Imagify; the timing and likelihood of regulatoryapproval of an NDA and MAA for Imagify; the level of clinical and commercialinterest in Imagify; the required size and make-up of a sales force toeffectively launch Imagify; our development of other product candidates; ourability to qualify a commercial manufacturing facility for Imagify; our capitalrequirements and our needs for additional financing; the timing and level offuture expenses, revenues and profitability; our estimates of the size of thepotential markets for our product candidates; our selection and licensing ofproduct candidates; our ability to attract and retain collaborators withacceptable development, regulatory and commercialization expertise; the benefitsto be derived from corporate collaborations, license agreements and othercollaborative efforts, including those relating to the development andcommercialization of our product candidates; sources of revenues andanticipated revenues, including contributions from corporate collaborations,license agreements and other collaborative efforts for the development andcommercialization of products; our ability to create an effective direct salesand marketing infrastructure for products we elect to market and sell directly;the rate and degree of market acceptance of our product candidates; the timingand amount of reimbursement for our product candidates; the success and timingof other competing therapies that are or may become available; and the manufacturingcapacity for our product candidates.*

 

*Ouractual results and the timing of certain events may differ materially from theresults discussed, projected, anticipated or indicated in any forward-lookingstatements. Any forward-looking statement should be considered in light offactors discussed in Part II. Item 1A “Risk Factors” and elsewhere in thisreport. We caution readers not to place undue reliance on any suchforward-looking statement, which speak only as of the date they are made. Wedisclaim any obligation, except as specifically required by law and the rules ofthe Securities and Exchange Commission, to publicly update or revise any suchstatements to reflect any change in company expectations or in events,conditions or circumstances on which any such statements may be based, or thatmay affect the likelihood that actual results will differ from those set forthin the forward-looking statements.*

 

*Thefollowing discussion should be read in conjunction with our consolidatedfinancial statements and related notes thereto included elsewhere in this Form 10-Q.*

 

**Overview**

 

We are a specialtypharmaceutical company that develops new drugs and improved formulations ofexisting drugs using our proprietary porous microparticle technology. We arefocused on developing proprietary drugs that can offer significant benefitssuch as improved safety and efficacy, increased patient compliance, greaterease of use, expanded indications or reduced cost. Our lead product candidate, ImagifyTM (perflubutane polymer microspheres),is a cardiovascular drug for the detection of coronary artery disease,the leading cause of death in the United States.  We submitted our NDA for Imagify in April 2008.  In Europe, we have entered into a collaborationagreement with Nycomed for the marketing and sale of Imagify. Nycomed isresponsible for the filing of an MAA for Imagify, which is currently expectedto take place in the second half of 2008. In addition to our progress withImagify, we have demonstrated that ourtechnology can improve the formulation of hydrophobic drugs and inhaled asthmadrugs.

 

We believe thatImagify perfusion ultrasound has the potential to significantly reduce thetime, cost and resources needed in the assessment of myocardial perfusion,compared to nuclear stress testing, without subjecting patients to radiation.Myocardial perfusion is blood flow to the heart muscle, a sensitive marker forcoronary artery disease.  There is no ultrasound imaging agent currentlyapproved by FDA for use in cardiac ultrasound for myocardial perfusion imagingor for any other indication in conjunction with cardiac stress ultrasound.

 

We developedImagify and our other product candidates using our proprietary technology whichenables us to control the size and porosity of particles, includingnanoparticles and microparticles, in a versatile manner, so we can customizethe particles to address the 

delivery needs ofa variety of drugs. We are focused on creating porous microparticles that aresmaller than red blood cells. Some of these microparticles are nanoparticleswhich are smaller than one micron. Small microparticles are important fordelivering drugs 

 

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intravenously sothat they can pass through the body’s smallest blood vessels, for increasingthe surface area of a drug so that the drug will dissolve more rapidly, and fordelivering drugs to the lung via inhalation. Porosity is important forentrapping gases in microparticles, for controlling the release rate of thedrug from a microparticle, and for targeting inhaled drugs to specific regionsof the lung.

 

We have incurredsignificant operating losses to develop our product candidates and weanticipate continuing to incur significant operating losses in the comingyears. In particular, we expect to incur significant additional expenses andexperience other significant capital requirements to seek regulatory approvalfor Imagify, to complete the qualification of a manufacturing facility for theinitial commercial manufacture of Imagify and, subject to regulatory approvals,to launch Imagify. Since our inception, we have funded our operations primarilythrough private and public placements of equity securities, equipment-backedfinancings and other debt financings.  AtMarch 31, 2008, we had approximately $24.7 million in cash and cashequivalents.  Based on our currentoperating plans, we will require significant additional capital to fund ouroperations beyond the third quarter of 2008. Since our present capitalresources are not sufficient to fund our planned operations beyond the thirdquarter of 2008, there is substantial doubt as to our ability to continue as agoing concern.

 

**Imagify****Phase 3 Clinical Trials**

 

We have completedtwo Phase 3 pivotal clinical trials for Imagify and have submitted an NDAseeking approval to market and sell Imagify. These two pivotal trials, named RAMP-1 and RAMP-2, respectively, wereindependent multi-center pivotal trials conducted at clinical sites primarilylocated in North America and Europe. “RAMP” stands for Real-time Assessmentof Myocardial Perfusion with echocardiography. Datafrom the Phase 3 pivotal studies are intended for submission to U.S., European,and potentially other regulatory authorities.

 

There were threedifferent ultrasound readers in each of RAMP-1 and RAMP-2 (six readers intotal). All three readers demonstrated non-inferiority to nuclear stress withrespect to the principal primary endpoint of accuracy.  In the RAMP-1 trial, the trial with therelatively lower risk patient population, the ultrasound blinded readersdemonstrated superior specificity (themeasure of effectiveness in assessing the absence of disease) comparedto nuclear stress. In the RAMP-2 trial, the trial with the relatively higherrisk patient population, the ultrasound blinded readers demonstrated superiorsensitivity (the measure ofeffectiveness in assessing disease) compared to nuclear stress. We demonstratedsuperior specificity in RAMP-1 and superior sensitivity in RAMP-2.  Only one of the three ultrasound blindedreaders demonstrated non-inferiority to nuclear stress for sensitivity inRAMP-1, and only one of the three ultrasound blinded readers demonstratednon-inferiority to nuclear stress for specificity in RAMP-2.  We believe that the missed component primaryendpoints in these trials was due largely to the inherent trade-off betweensensitivity and specificity caused by “aggressive” and “conservative”ultrasound and nuclear readers. While these component primary endpoints weremissed, we believe that both trials demonstrated that, overall, Imagifyperfusion stress ultrasound is just as accurate as nuclear stress across allreaders. We also believe that because, in addition to achieving the principalprimary endpoint in both trials, Imagify perfusion stress ultrasound alsodemonstrated superior results on component primary endpoints which we believewere the most important in each of these trials (specificity in the lower riskpatient population and sensitivity in the higher risk patient population).  We submitted an NDA for Imagify in April 2008.

 

The discussion ofour NDA submission and likelihood of success reflects our current assumptions,based on our knowledge and experience and the guidance of our advisors. We cannot assure you that timelines will be met, nor can we assure you that ourestimates and assumptions will not change based upon ongoing regulatoryfeedback or that FDA will accept our NDA or approve our NDA once accepted.  We cannot control nor predict the timing orextent, if any, of FDA approval of Imagify. Nycomed is responsible for the submission of Imagify for regulatoryapproval in Europe. We cannot control nor predict the timing or extent, if any,of Imagify approval in Europe or elsewhere.

 

**Imagify****Manufacturing Facility Update**

 

As part of our NDAsubmission for Imagify, we demonstrated that we can manufacture Imagify atcommercial scale. We must also demonstrate that we can manufacture Imagify inaccordance with European regulatory requirements, prior to Nycomed filing anMAA for Imagify.

 

In late 2005 wesubstantially completed the build-out of a 58,000 square foot commercialmanufacturing facility in Tewksbury, Massachusetts.  In 2006 we completed commissioning of themanufacturing equipment and utilities, produced full commercial scaledevelopment batches of Imagify and substantially completed all InstallationQualification, or IQ, and Operational Qualification, or OQ, requirementsrelating to the equipment and utilities initially needed for thisfacility.  In 2007, we continued to makeprogress on the remaining steps toward the qualification of the manufacturingfacility, with aseptic validation completed in early 2008.  We are currently working to complete theprocess validation batches, which is required in Nycomed’s  MAA submission in Europe.  Data from the production of 

 

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Imagify atcommercial scale and the aseptic validation data were included in our NDAsubmission of Imagify.  We believe thatour existing facilities are adequate to meet our current and initial projectedcommercial requirements and that suitable space will be available as needed.

 

**Operational Activities Update**

 

Our currentoperational activities include:

 

*NDA/MAA*: We completed aseptic validation in early 2008.  We submitted our NDA for Imagify with FDA in April 2008.  We expect to receive initial feedback fromFDA regarding the completeness of our NDA submission within 60 days of thesubmission date, with a formal response from FDA in approximately 10 monthsfrom the submission date.  This formalresponse date, anticipated for the first quarter of 2009, is referred to as ourPDUFA (“Prescription Drug User Fee Act”)date.  We submitted the NDA in electronicCTD format, which can also be utilized for submission in Europe.  We are currently working to complete theprocess validation batches, which is required in the MAA submission by Nycomed,our European partner, who currently plans to submit the MAA to Europeanregulatory authorities in the second half of 2008.

 

*Preparationsfor Commercialization of Imagify*: We plan to continue to conduct market research andadvance our plans for the commercial launch of Imagify.  We also plan to conduct various clinicaltrials following the PDUFA date, designed to support the commercialization ofImagify.  We are currently preparing ourmanufacturing facility for a Pre-Approval Inspection to be conducted by FDAprior to the PDUFA date in the second half of 2008, or early 2009.

 

*Publicationof Imagify Results*:In November 2007 we presented data from the RAMP-1 and RAMP-2 clinicaltrials at the annual American Heart Association meeting in Orlando, Florida andin December 2007, at EuroECHO 2007 in Lisbon, Portugal. We will continueto work with the clinical investigators to publish further data on our clinicaltrial results.

 

*StrategicPartnership*: Weare pursuing a strategic partnership agreement for Imagify in order to providea strengthened financial basis for moving the Imagify program forward as wellas to provide additional resources for advancing our other product candidates.

 

*OtherProduct Development*:In March 2008 we entered into a license agreement with Cephalon, Inc.(“Cephalon”) providing Cephalon with an exclusive, worldwide license to ourHydrophobic Drug Delivery System (HDDS) for oncology applications, along withthe rights to AI-850, our patented formulation of paclitaxel, in exchange for acash payment of $10.0 million.  This product developmentcandidate, AI-850, and AbraxaneTM, a registered trademark of Abraxis Bioscience, Inc.,have comparable pharmacokinetic profiles based upon human data available inpublications on each drug.  AI-850 is ourpatented formulation of paclitaxel, the active ingredient in AbraxaneTM. Drug product candidates that areconfirmed to have equivalent pharmacokinetics in a human study may be eligiblefor regulatory approval as a bioequivalent and the development timelineis accelerated, since Phase 2 and Phase 3 human clinical trials are notrequired.

 

Although we areworking towards the achievement of these operational objectives, there can beno assurance that we will successfully achieve these objectives in a timely orsuccessful manner, or that they will be achieved at all.

 

**EuropeanCollaboration Agreement**

 

In July 2004,we entered into a collaboration, license and supply agreement with Nycomedpursuant to which we granted Nycomed rights to develop and market Imagify inEurope. As part of the agreement, Nycomed agreed to provide up to$70.0 million in license fees, research and development funding, andmilestone payments, of which $12.0 million for research and developmenthas been received.  In October 2005and February 2006, we and Nycomed amended the agreement, and an additional$2 million was received for trademark and activities associated with the qualification of our manufacturingfacility. The payments received pursuant to these amendments were consideredadvances against future milestone payments, and have been deducted from the $58million in remaining milestone payments. Therefore, we have $56 million remaining in milestone payments, of whichthe next payment is due upon the first commercial sale of Imagify.  In addition, Nycomed has agreed to pay us tomanufacture Imagify for them and to pay us royalties on Nycomed’s sales ofImagify. Nycomed will be responsible for sales, marketing and the regulatorysubmissions required for marketing throughout its sales territory, whichincludes the member states of the European Union, as well as Russia/CIS andTurkey.

 

The Nycomedagreement is subject to termination provisions. Under certain of thesetermination provisions, if we fail in any material respect to use allcommercially reasonable efforts to carry out our obligations under theagreement, we would be obligated to pay Nycomed liquidated damages of up to$12.0 million. We believe we have and continue to use all commerciallyreasonable efforts to 

 

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fulfill ourobligations under the agreement, which we believe are in our control. However,there can be no assurance that termination of this agreement will not occur orthat such termination would not result in us incurring liquidated damages of upto $12.0 million.

 

**FinancialOperations Overview**

 

*Revenue.*    We have notgenerated any revenue from product sales since our inception. Since July 2004,when we entered into our collaboration agreement with Nycomed, the majority ofour revenue has been collaboration revenue recognized in connection with researchand development activities performed under this agreement.  As of March 31, 2008 Nycomed had paid us$12.0 million in license fees for our research and development efforts. We arerecognizing this $12.0 million of initial license and research and developmentpayments ratably over a period currently estimated at 54 months.  The length of this research and developmentperiod, which is the period over which we are obligated to perform services, isestimated based on available facts and circumstances.  We periodically evaluate the assumptionsunderlying our estimate and change our estimate when appropriate.

 

Under the March 2008intellectual property license agreement with Cephalon, Inc., we did notrecognize any revenue since not all revenue recognition criteria were met as ofMarch 31, 2008.

 

Further in thefuture, we will seek to generate revenue from a combination of product sales,up-front or milestone payments and manufacturing payments in connection withcollaborative or strategic relationships, and royalties resulting from thelicense of our products and intellectual property.

 

*Researchand Development Expense.  * Research and development expense consists of expensesincurred in developing, manufacturing and testing product candidates. Theseexpenses consist primarily of salaries and related expenses for personnel, feespaid to professional service providers in conjunction with independentlymonitoring our clinical trials and acquiring and evaluating data in conjunctionwith our clinical trials, costs of materials used in clinical trials andresearch and development, depreciation of capital resources used to develop ourproducts, costs of facilities, the legal costs of pursuing patent protection onselect elements of our intellectual property, costs for intellectual propertyrights we have acquired or licensed and stock-based compensation. We expenseresearch and development costs, including patent related costs, as incurred. Webelieve that significant investment in product development is a competitive necessityand plan to continue these investments in order to realize the potential of ourproduct candidates and proprietary technologies. Development programs for laterstage product candidates, such as Imagify, tend to cost more than earlier stageprograms due to the length and the number of patients enrolled in clinicaltrials for later stage programs and due to costs of scaling production tocommercial scale.

 

*Generaland Administrative Expense.  * General and administrative expense consists primarilyof salaries and other related costs for personnel in executive, finance,accounting, information technology, business development and human resourcefunctions. Other costs include facility costs not otherwise included inresearch and development expense, professional fees for legal and accountingservices and stock-based compensation. In addition, we categorize our market research and other marketing-typecosts as general and administrative expense because we have not yet obtainedapproval to market or sell our product candidates.

 

*InterestIncome.*    Interestincome consists of interest earned on our cash and cash equivalents.

 

*InterestExpense.*   Interest expense consists primarily of interest incurred on equipment leases,equipment loans and other financing arrangements.

 

*Changein Valuation of Derivative.  * The terms of our February 2005 convertiblepreferred stock offering and our March 2005 Mass Development loanagreement contain features considered to be embedded derivatives which arerecorded at estimated fair value in accordance with Statement of FinancialAccounting Standards No. 133, *Accounting for DerivativeInstruments* (SFAS 133).Change in valuation of derivative consists of otherincome (expense) recognized on the change in fair value of the derivative atthe end of each reporting period.  Thechange in the value of the embedded derivative related to the preferred stockis affected by a number of assumptions including the number of preferred sharesoutstanding, the amount of dividends paid and the probability and timing ofconversion into common stock. The derivative liability is reduced for anymake-whole payments made during the period upon conversions of preferred stockto common stock. The change in the value of the derivative related to the loanis affected by the expected timing of future positive net cash flows fromoperations.

 

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*Dividends on PreferredStock.  *For the three months ended March 31, 2008 and 2007, dividends on preferredstock consisted of dividends paid or accumulated on the convertibleexchangeable preferred stock which we issued in February 2005. Dividendson preferred stock exclude any make-whole payments on conversion of preferredstock to common stock. Dividends on our preferred stock are cumulative from thedate of original issue at the annual rate of $3.25 per share, payable quarterlyon the first day of March, June, September, and December. Any dividend paymentmust be declared by our board of directors and must come from funds that arelegally available for dividend payments. In February 2008, the Company’s board of directors did not declarethe quarterly dividend on the preferred stock, payable on March 1, 2008.This dividend, which would have totaled $0.5 million in the aggregate, has beenincluded in current liabilities as of March 31, 2008.

 

**Results of Operations**

 

*Three Months Ended March 31,2008 and 2007*

 

*Revenue.*    In connection with ourcollaboration agreement with Nycomed entered into in July 2004, Nycomedhas paid us $12.0 million in license fees for our research and developmentefforts. We had previously been recognizing this $12.0 million in research anddevelopment payments ratably over the estimated development period, as defined,of 42 months.  Estimation of thisdevelopment period involves the evaluation of many assumptions anduncertainties inherent in the performance of a long term developmentproject.  We regularly evaluate theseassumptions and uncertainties and our estimated development recognition periodmay change if facts and circumstances change.  We reevaluated theassumptions underlying the development term and during 2006 modified ourestimate of the development period over which we are obligated to performservices to 54 months.  Collaboration revenuerecognized under this agreement for both the three months ended March 31,2008 and 2007 was approximately $0.7 million.

 

Under the March 2008intellectual property license agreement with Cephalon, Inc., we did notrecognize any revenue as not all of the revenue recognition criteria were metas of March 31, 2008.

 

*Research and Development Expense*.    Research anddevelopment expense for the three months ended March 31, 2008 increased$0.7 million, or 7%, to $10.7 million versus $10.0 million in the prior yearperiod. The increase was primarily due to a one time charge for a payment dueunder an intellectual property agreement of $0.8 million.

 

The following table summarizes the primary components of ourresearch and development expense for the three months ended March 31, 2008and 2007:

 
| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                             | ** ** | **(In thousands)**                              | ** ** |
| Imagify                                |       | $                                                    | 5,442      |   | $ | 4,001 |   |
| HDDS and PDDS                          |       | 126                                                  |       | 656 |   |
| Other direct costs                     |       | 833                                                  |       | 1,691 |   |
| Total direct costs                     |       | $                                                    | 6,401      |   | $ | 6,348 |   |
| Indirect costs:                        |       |                                                 |       |   |   |
| Facility rent costs                    |       | 845                                                  |       | 863 |   |
| Depreciation                           |       | 2,479                                                |       | 2,470 |   |
| Other indirect costs                   |       | 1,016                                                |       | 307 |   |
| Total indirect costs                   |       | 4,340                                                |       | 3,640 |   |
| Total research and development expense |       | $                                                    | 10,741     |   | $ | 9,988 |   |

 

*LateStage Clinical Development Program**(Imagify).*  Our lead product candidate, Imagify, is acardiovascular drug designed for the detection of coronary artery disease.Direct expense for research and development of Imagify was $5.4 million for thethree months ended March 31, 2008 versus $4.0 million in 2007.  Clinical trial costs relating to Imagifypivotal trials decreased in 2008 versus 2007, following the release of RAMP-2results in May 2007, however these savings were offset by increased costsfor manufacturing and materials.

 

*EarlyStage Development Programs**(HDDS and PDDS).*  During 2008, we anticipate thecosts of early stage development programs to decrease as we increase our focuson supporting our Imagify NDA and MAA submissions.  Because these other programs are in 

 

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relatively earlystages of development, we anticipate that costs related to Imagify willcontinue to represent our primary research and development expenditures through2008.

 

*Other Costs.* Other direct research and development costsprimarily consist of management and preclinical evaluation of other productcandidates.

 

Each of ourresearch and development programs is subject to risks and uncertainties,including the requirement to seek regulatory approvals, which are outside of ourcontrol.  Moreover, the productcandidates identified in these research and development programs, particularlyour early stage programs, must overcome significant technological,manufacturing and marketing challenges before they can be successfully commercialized.As a result of these risks and uncertainties, we are unable to predict with anycertainty the period in which material net cash inflows from such projectscould be expected to commence or the completion date of these programs. Failureto commercialize these product candidates on a timely basis could have amaterial adverse affect on our business, financial condition and results ofoperations. We may seek to establish collaborative relationships to help uscommercialize these product candidates, but there can be no assurance that wewill be successful in doing so.

 

*Generaland Administrative Expense.*    General and administrativeexpense for both the three months ended March 31, 2008 and 2007 was  $3.2 million.

 

The followingtable summarizes the primary components of our general and administrativeexpense for the three months ended March 31, 2008 and 2007:

 
| ** **                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                               | ** ** | **(In thousands)**                              | ** ** |
| Direct costs                             |       | $                                                    | 2,933      |   | $ | 3,039 |   |
| Indirect costs:                          |       |                                                 |       |   |   |
| Facility costs                           |       | 196                                                  |       | 126 |   |
| Depreciation                             |       | 42                                                   |       | 55 |   |
| Total indirect costs                     |       | 238                                                  |       | 181 |   |
| Total general and administrative expense |       | $                                                    | 3,171      |   | $ | 3,220 |   |

 

*InterestIncome.*    Interestincome for the three months ended March 31, 2008 decreased $0.5 million,or 71%, to $0.2 million versus $0.7 million in the prior year period.  Thedecrease was primarily due to lower average cash balances during the period.

 

*InterestExpense.*    Interestexpense for the three months ended March 31, 2008 decreased $0.1 million,or 20%, to $0.4 million versus  $0.5million in the prior year period.

 

*Changein Valuation of Derivative.*  The derivativeis related to the embedded derivative instrument from the dividend make-wholepayment feature of the preferred stock offering that closed in February 2005.The derivative liability value is reduced as dividends payments on thepreferred stock are made, as well as for any conversions of preferred stockinto common stock.  The derivativeliability at March 31, 2008 was valued at $0.

 

**Liquidity and Capital Resources**

 

Historically, wehave financed our business through the issuance of equity securities, debtfinancings and equipment leases and, more recently, with funds from ourcollaboration with Nycomed and Cephalon. Our liquidity requirements have arisenprimarily from research and development expenditures, equipment expendituresand payments on outstanding indebtedness. As of March 31, 2008, we hadcash and cash equivalents of $24.7 million. As of March 31, 2008 we owed$0.1 million from capital leases and $15.6 million from notes payable andother long-term obligations. We also had operating lease commitments totaling$12.6 million for rent of our facilities.

 

We will requiresignificant additional funds in order to continue to fund our operations beyondthe third quarter of 2008. We may raise these funds through public or privatesales of equity, or from borrowings, or from strategic partners. Our futurecapital requirements will depend on many factors, including the scope andprogress made in our research and development activities and the size andtiming of creating expanded manufacturing capabilities. We may also needadditional funds for possible future strategic acquisitions of businesses,patent licenses, products or technologies complementary to our business. We donot expect to generate significant revenues from Imagify, other than possiblelicense or milestone payments, unless or until we or current or potentialpartners submit an application for and receive marketing approval from theapplicable regulatory authorities. The depletion of our resources may make 

 

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future fundingmore difficult or expensive to attain. When additional funds are required or,in advance of such requirements, we may raise such funds from time to timethrough public or private sales of equity or from borrowings or from strategicpartners or we may delay funding of certain development activities which coulddelay the approval and/or commercialization of Imagify, which would have anegative impact on our growth plans. We are evaluating our fundingalternatives. Additional equity financing will be dilutive to our stockholders;debt financing, if available, may involve significant cash payment obligationsand covenants that restrict our ability to operate as a business; and strategicpartnerships may result in royalties or other terms which reduce our economicpotential from products under development, including Imagify.  Since our present capital resources are notsufficient to fund our planned operations beyond the third quarter of 2008,substantial doubt about our ability to continue as a going concern existswithout successfully raising funds as described above.  If we are unable to execute our operationsaccording to our plans or to obtain additional financing, we may be forced tocease operations.

 

During the threemonths ended March 31, 2008, operating activities used approximately$24,000 of cash. Net cash used by operating activities during this periodresulted primarily from a net loss of $13.5 million, partially offset byan increase in deferred revenue of $10.0 million as a result of the licenseagreement with Cephalon, Inc. and non-cash charges for depreciation andamortization of $2.5 million.

 

During the threemonths ended March 31, 2008, investing activities used approximately $35,000in cash. This use of cash was primarily used for purchases of equipmentincurred in connection with our commercial manufacturing facility for Imagify.

 

During the threemonths ended March 31, 2008, financing activities used $1.3 millionin cash, primarily due to payments on long term obligations.

 

We presentlyestimate that the total quarterly cash outflows will approximate $9 to $13million with the low end of the range being more reflective of the latter partof the year.  Based upon these projections and the current cash position,we expect the need for additional sources of funds to operate beyond the thirdquarter of 2008.

 

Our currentvacation policy allows employees to carry over unused vacation time as ofDecember 31 of each year, up to a maximum of two weeks.  However, several employees who joined theCompany prior to the institution of this vacation policy had accumulated morethan two weeks vacation at December 31, 2007.  These employees had been allowed to carrythis excess vacation accrual forward each year, their prior accumulatedvacation time was “grandfathered”. Therefore, the accrued vacation balance at March 31, 2008 includedsome of this prior accumulated vacation pay. In April 2008 we paid approximately $0.7 million to employees,representing the total accumulated vacation liability as of March 31, 2008,and related payroll taxes.

 

In March 2008we entered into a license agreement with Cephalon, Inc. (“Cephalon”)providing Cephalon with an exclusive, worldwide license to the Company’sHydrophobic Drug Delivery System (HDDS) for oncology applications, along withthe rights to AI-850, the Company’s formulation of paclitaxel, in exchange fora cash payment of $10.0 million, paid upon the execution of the agreement.  The Company has recorded this payment indeferred revenue at March 31, 2008.

 

In May 2007we amended our license agreement with GE Healthcare AS, a division of GeneralElectric Company (“GE”). Under the terms of the original agreement dated June 1,2006 we were scheduled to make a payment to GE of $5.0 million on June 1,2007.  The amendment provides that, in lieu of this payment, we will makea series of payments due as follows: $1.5 million was paid in May 2007;and six consecutive quarterly installments of $0.9 million are due on the firstday of the third month of each calendar quarter, commencing June 1, 2008.

 

In April 2007we amended our patent transfer agreement with Bayer Schering Pharma AG (“Bayer”).Under the terms of the original agreement dated May 11, 2005 we werescheduled to make a final payment to Bayer of $3.0 million in May 2007.  The amendment provides that, in lieu of thispayment, we will make a series of payments due as follows: $1.5 million waspaid in May 2007, $1.0 million is due in May 2008 and $1.0 million isdue in May 2009.

 

Effective June 1,2006, we entered into an agreement to license on a non-exclusive basis variousultrasound-related intellectual property from Bracco International BV, orBracco. In consideration for the non-exclusive license of these patents, weagreed to pay Bracco up to a total ofEuros 3.0 million, of which Euros 0.5 million (approximately $0.6million) was paid in June 2006. Another payment of Euros 0.5 million (approximately$0.8 million) is payable to Bracco within is due within five business daysafter acceptance by the FDA of the filing of our NDA for Imagify, which wassubmitted in April 2008.  Anadditional Euros 2.0 million is payable upon the Company’s achievement ofcertain defined regulatory milestones. The Company also agreed to pay a royalty on future Imagify revenue, upto a maximum royalty amount of Euros 10.0 million, less a portion of theabove-referenced milestone payments. Whereas the other obligations arecontingent upon the outcome of future events, they have not been recorded atthis time.

 

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On each of May 18,2007, March 28, 2007 and January 5, 2007, we entered into promissorynotes with General Electric Capital Corporation (“GE Capital”) each of whichtotaling in aggregate original principal amount approximately $0.3 million forequipment already purchased by us. The promissory notes include annual interestrates of 10.55%, 10.41% and 10.60%, respectively, and are payable over 42consecutive months. The promissory notes are secured by the equipment financedpursuant to the terms of our Master Security Agreement with GE Capital. Thenotes are subject to acceleration upon certain events of default, including butnot limited to: i) the failure to make timely payments of principal andinterest, ii) a default on other material obligations, or iii) a materialadverse change in the financial condition of the borrower.

 

In June 2005,we entered into a equipment financing line with Oxford Finance Corporation, orOxford.  In 2005 and 2006, we borrowed anaggregate of $7.0 million against this line. As of March 31, 2008, net ofrepayments, we had $2.9 million outstanding under this line. Such borrowingsare collateralized by corresponding equipment and other capital purchases withrepayment due in monthly installments over 36 to 48 months, depending onthe nature of the equipment financed, with the last such repayment scheduledfor March 2010. Interest rates on these borrowings were fixed at the timeof each borrowing and range from 10.3% to 10.9%.  The loans under this line are subject toacceleration upon certain events of default, including but not limited to thefailure to make timely payments of principal and interest, a default on othermaterial obligations, or a material adverse change in the financial conditionof the borrower.

 

In March 2005the Company borrowed $2.0 million under a loan agreement withMassDevelopment to help finance certain tenant improvements to its commercialmanufacturing facility in Tewksbury, Massachusetts. The loan is secured bycertain improvements made at the facility, interest accrues at 5.0% per annumwith retroactive adjustments to 9.0% in the event the Company achieves positiveoperating cash flow, as defined in the agreement, prior to repayment of theloan. Accrued principal and interest are being repaid over a 10 year term. Theloan is subject to acceleration upon certain customary events of default,including failure to timely pay principal and interest. Acusphere began makingpayments on this loan in May 2007 and as of March 31, 2008, hasapproximately $2.0 million outstanding under the loan, including principal andinterest.

 

In February 2005, we issued 900,000 shares of 6.5% convertible exchangeable preferredstock, our Preferred Stock, at $50.00 per share resulting in net proceeds ofapproximately $41.9 million after deducting underwriting discounts, commissionsand offering expenses. Each share of Preferred Stock has a liquidationpreference of $50.00 per share. Dividends on the Preferred Stock are cumulativefrom the date of original issue at the annual rate of $3.25 per share, payablequarterly on the first day of March, June, September, and December. Anydividends must be declared by our board of directors and must come from fundsthat are legally available for dividend payments.  During the three monthsended March 31, 2008 and 2007, we paid $0 and $0.6 million, respectively,in dividends on our Preferred Stock. As of March 31, 2008, 650,000 sharesof Preferred Stock were outstanding, accrued and unpaid dividends totaledapproximately $0.5 million.

 

In February 2008, our Board of Directors electednot to declare a quarterly cash dividend that was otherwise payable on March 1,2008. This is the first quarterly dividend that has not been declared or paidon the preferred stock. If we have not paid dividends on the preferred stock inan aggregate amount equal to at least six quarterly dividends whether or notconsecutive, we must increase the size of our board of directors by twoadditional directors. After this time, and for so long as these dividendsremain due and unpaid, holders of the preferred stock, voting separately as aclass with holders of preferred stock ranking on the same basis as to dividendshaving like voting rights, will be entitled to elect two additional directorsat any meeting of stockholders at which directors are to be elected.

 

We may elect toautomatically convert some or all of the Preferred Stock into shares of ourcommon stock if the closing price of our common stock has exceeded $10.30 pershare (150% of the conversion price) for at least 20 trading days during any30-day trading period, ending within five trading days prior to notice of automaticconversion. Prior to March 1, 2009, if we elect to automatically convert,or if any holder elects to voluntarily convert, the Preferred Stock, we willalso make an additional payment, the Make-Whole payment, equal to the aggregateamount of dividends that would have been payable on the Preferred Stock soconverted from the original date of issuance through and including March 1,2009, less any dividends already paid on the Preferred Stock. This additionalpayment is payable by us, at our option, in cash, in additional shares of itscommon stock, or in a combination of cash and shares of common stock.  Wehave reserved a maximum of approximately 900,000 shares of common stock forissuance under this Make-Whole provision.

 

Through March 31,2008, 250,000 shares of Preferred Stock have been voluntarily converted into1,822,157 shares of the Company’s common stock. In connection with suchconversions, the Company issued an additional 374,822 shares of the Company’scommon stock in satisfaction of the required Make-Whole payment.

 

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We may elect toredeem the Preferred Stock at declining redemption prices on or after March 6,2009.  The Preferred Stock is exchangeable, in whole but not in part, atour option on any dividend payment date beginning on the exchange date (March 1,2006) for our 6.5% convertible subordinated debentures, or the Debentures, atthe rate of $50 principal amount of Debentures for each share of PreferredStock. The Debentures, if issued, will mature 25 years after the exchange dateand have terms substantially similar to those of the Preferred Stock.

 

In April 2004,we entered into an equipment financing line with General Electric CapitalCorporation.  In 2004 and 2005 weborrowed an aggregate of $10.5 million under the equipment financing line.  As of March 31, 2008, net of repayments,we had $3.8 million outstanding. Borrowings are collateralized by the equipment financed with repaymentdue in monthly installments over 36 to 48 months, with the last such repaymentscheduled for December 2010. Interest rates on these borrowings were fixed at the time of eachborrowing and range from 8.7% to 10.7%. The loans under this line are subjectto acceleration upon certain events of default, including but not limited to:i) the failure to make timely payments of principal and interest, ii) a defaulton other material obligations, or iii) a material adverse change in thefinancial condition of the borrower.

 

In July 2004,we entered into a collaboration, license and supply agreement with Nycomed inwhich we granted Nycomed rights to develop and market Imagify in Europe. Underthe original terms of this agreement, Nycomed paid us license fees and researchand development payments totaling $12.0 million. The original agreement alsoprovides for Nycomed to pay to us up to $58.0 million in milestonepayments upon achievement of certain regulatory milestones and sales goals.Under the agreement, Nycomed has agreed to pay us to manufacture Imagify for themand to pay us royalties on Nycomed’s sales of Imagify. In October 2005 andFebruary 2006, our agreement with Nycomed was amended such that Nycomedpaid us an additional $2.0 million for trademark activities and activitiesassociated with the qualification of our manufacturing facility. Theseamendments were considered advances against future milestone payments, and havebeen deducted from the $58 million in remaining milestone payments.  Therefore, we have $56 million remaining inmilestone payments. No additional funds are expected from Nycomed under theagreement for the next twelve months.

 

**ShelfRegistration Statement**

 

We have on file with the U.S. Securities and ExchangeCommission, or SEC, a “universal shelf” registration statement on Form S-3(Registration No. 333-134263) and auniversal shelf registration statement on Form S-3 (Registration No. 333-123854),which provide for theoffer, from time to time, of common stock, preferred stock, debt securities andwarrants up to an aggregate remaining availability, as of March 31, 2008,of approximately $33.5 million and $27.3 million, respectively. The SECdeclared the shelf registration statementseffective on August 18, 2006 and April 15, 2005, respectively. In April 2008, the registration statement on Form S-3(Registration No. 333-123854) expired and is no longer available to us forthe sale of securities in a public offering. In addition, new rules recently adopted by the SEC currently limitour ability to utilize a shelf registration statement to no more than one-thirdof our unaffiliated public float over any twelve month period. Subject to theselimitations, market conditions and our capital needs, and to the extent and solong as we are then eligible to use the registration statements under SEC rules,we may again seek to use any remaining availability under the shelfregistration statements by making an offering of securities covered for saleunder the registration statements. In addition, we may amend our shelfregistration statements or file a new shelf registration statement toincrease our potential access to capital. If we elect to raise additionalcapital using a shelf registration statement, we may use the net proceeds fromthe sale of these securities for general corporate purposes, which may includefunding clinical trials, research and development, regulatory activities,acquisitions, including acquisitions of companies, products, intellectualproperty or other technology, repayment or refinancing of existingindebtedness, investments, capital expenditures, repurchase of our capitalstock and for any other purposes that we may specify in any prospectussupplement.

 

**Off-BalanceSheet Financing Arrangements**

 

We currently donot have any special purpose entities or off-balance sheet financing arrangementsother than operating leases.

 

**ContractualObligations**

 

The followingtable summarizes our contractual obligations as of March 31, 2008 and theeffect such obligations are expected to have on our liquidity and cash flow infuture periods:

 

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| ** **                       | ** ** | **Payments Due by Period (in 000’s)** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                                           | ** ** | **2008** | ** ** | **2009 - 2010** | ** ** | **2011 - 2012** | ** ** | **2013 and  Beyond** | ** ** |
| Long-Term Debt                   |       | $                                                                   | 9,663      |   | 4,100 |   | 4,130 |   | 670 |   | 763 |   |
| Capital Lease Obligations        |       | 66                                                                  |       | 24 |   | 42 |   | — |   | — |   |
| Operating Lease Obligations      |       | 12,595                                                              |       | 2,305 |   | 6,092 |   | 4,198 |   | — |   |
| Purchase Obligations             |       | 112                                                                 |       | 112 |   | — |   | — |   | — |   |
| Other Long-Term Obligations      |       | 7,500                                                               |       | 3,750 |   | 3,750 |   | — |   | — |   |
| **Total**                        |       | $                                                                   | 29,936     |   | 10,291 |   | 14,014 |   | 4,868 |   | 763 |   |

 

Long-Term Debt of $9.7 million includes $4.1 million in principal andinterest payable to GeneralElectric Capital Corporation (“GE”) and$3.2 million in principal and interest payable to Oxford Finance Corporation (“Oxford”)under equipment loans with payments due in monthly installments over 36to 48 months, collateralized by the corresponding equipment.  Theloans under the GE line are subject to acceleration upon certain events ofdefault, including but not limited to: i) the failure to make timely paymentsof principal and interest, ii) a default on other material obligations, or iii)a material adverse change in the financial condition of the borrower.  Theloans under the Oxford line are subject to acceleration upon certain events ofdefault, including but not limited to the failure to make timely payments ofprincipal or a default on other material obligations.

 

Also includedunder Long-Term Debt is $2.4 million in principal and interest payments dueunder the MassDevelopment loan, under which we borrowed $2.0 million tofinance improvements to our commercial manufacturing facility in Tewksbury,Massachusetts. Interest accrues under the loan at 5.0% per annum withretroactive adjustments to 9.0% in the event we achieve positive operating cashflow as defined in the agreement without prior repayment of the loan. Nopayments were due under the loan for the first 24 months and we began loanrepayments in May 2007. The loan has a 10 year repayment term and issubject to acceleration upon certain events of default, including failure totimely pay principal and interest.

 

Capital Lease Obligations asclassified pursuant to FASB Statement of Financial Accounting Standards No. 13,*Accounting for Leases*relate to leases for businessequipment.  We leased capital equipmentthrough Banc of America Leasing Corporation. The remaining monthly paymentsrange from $460 to $1,019 with maturities through June 2010.

 

Our operatinglease obligations of $12.6 million relate primarily to our headquarters andmanufacturing facility leases under which we pay monthly rent. Our Watertown,Massachusetts headquarters lease has an original term of 10 years, which beganin December 2001, and which was extended by six months during 2005. Thelease for our commercial manufacturing space in Tewksbury, Massachusetts has aninitial five year, nine month term, which began in July 2004, with optionsto extend the lease for up to two additional five-year terms at predeterminedrental rates.

 

Purchase Obligations include one purchase order to asupplier for material.

 

Other Long-Term Liabilities includes approximately$5.5 million payable to GE Healthcare pursuant to the amended intellectualproperty license agreement, consisting of six consecutive quarterlyinstallments of $0.9 million due on the first day of the third month of eachcalendar quarter, commencing June 1, 2008.   Other Long-Term Liabilities also includes$2.0 million payable Schering Pharma AG (“Schering”) pursuant to intellectualproperty acquisition agreement, consisting of a $1.0 million payment due in May 2008and a $1.0 million payment due in May 2009.

 

**CriticalAccounting Policies and Estimates**

 

Our discussion andanalysis of our financial condition and results of operations are based on ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses. Onan on-going basis, we evaluate our estimates and judgments, including thoserelated to revenues, accrued expenses, fair valuation of stock related tostock-based compensation and income taxes. We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

We believe thefollowing critical accounting policies affect our more significant judgmentsand estimates used in the preparation of our consolidated financial statements.

 

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*Revenue.  * We recognize revenue from licensearrangements in accordance with Staff Accounting Bulletin No. 104, *Revenue Recognition* (“SAB 104”) and FASB Emerging Issue TaskForce Issue No. 00-21, *Accounting for RevenueArrangements with Multiple Deliverables* (“EITF 00-21”). We recognizerevenue from license payments not tied to achieving a specific performancemilestone ratably over the period over which we are obligated to performservices. The period over which we are obligated to perform services is estimatedbased on available facts and circumstances. We recognize revenue fromperformance payments, when such performance is substantially in our control andwhen we believe that completion of such performance is reasonably probable,ratably over the period over which we estimate that we will perform suchperformance obligations. Substantive at-risk milestone payments, which arebased on achieving a specific performance milestone when performance of suchmilestone is contingent on performance by others or for which achievement cannot be reasonably estimated or assured, are recognized as revenue when themilestone is achieved and the related payment is due, provided that there is nosubstantial future service obligation associated with the milestone. We do notrecognize revenue in connection with license arrangements until payments arecollected or due and reasonably assured of being collected. In addition, we donot recognize revenue in circumstances where the arrangement includes a refundprovision until the refund condition is no longer applicable unless, in ourjudgment, the refund circumstances are within our operating control andunlikely to occur. Payments received in advance of being recognized as revenueare deferred.

 

In connection withfeasibility studies, contract amounts which are not due until thecustomer accepts or verifies the research results are not recognized as revenueuntil customeracceptance, assuming collectibility is reasonable assured.

 

We are recognizingcollaboration revenue of $12.0 million associated with the initial license andperformance-based payments under the Nycomed agreement based on an estimatedrecognition period of fifty-four months over which we are obligated to performservices supporting the agreement. At the time we entered into our agreementwith Nycomed, we estimated that the development period would be 42 months.  This estimate was revised to 54 months in thethird quarter of 2006.  The effect ofthis change in estimate resulted in $1.9 million less revenue recorded in 2006than would have been recorded had the development period remained at 42months.  There was no change in theestimated development period during 2007 and for the three months ended March31, 2008. Estimation of this development period involves many assumptions,including estimates relating to completion of activities for which we arereliant on Nycomed and independent regulatory authorities to achieve.  Our estimated development recognition periodmay change again if facts and circumstances change. Were the estimateddevelopment period to be extended, we may be required to record a reduction incumulative revenue recognized in our statement of operations in the period inwhich the change in development period is determined.

 

Our agreement withNycomed has been modified such that Nycomed has paid us $0.2 million foractivities associated with creating a brand name for Imagify and relatedtrademark activities and paid us $1.8 million to support the validation of theour commercial manufacturing facility for Imagify. These amounts wereoriginally scheduled to be paid to us upon Nycomed’s filing for regulatoryapproval of Imagify in Europe. While the amounts are not refundable, we plan todefer recognition of these amounts until after the original regulatory filingmilestone has been achieved. Payments received for current and potential HDDSand PDDS feasibility studies, which are offset by costs incurred for suchstudies, are recognized as revenue over the estimated performance period ofeach such study. A change in these estimates could result in a significantchange to the amount of revenue recognized in future periods. In addition, ifthe Nycomed collaboration agreement is terminated for reasons other thancertain non-performance by us, we would recognize the remainder of the paymentswe have received or otherwise expect to collect over the amortization period atthe time of termination. We will not recognize revenue associated with thepotential additional $56 million in milestone-based payments that may be earnedunder the Nycomed agreement until the underlying regulatory and salesmilestones are achieved.

 

We entered into alicense agreement with Cephalon, Inc., providing Cephalon with a licenseto our Hydrophobic Drug Delivery System (HDDS) for oncology applications, alongwith the rights to AI-850, our formulation of paclitaxel, in exchange for acash payment of $10.0 million, paid upon the execution of the agreement.  We recorded this payment in deferred revenueat March 31, 2008.

 

*Propertyand Equipment.*  Property and equipment are recorded at cost and depreciated over theirestimated useful lives of three to five years using the straight-line method.The majority of our equipment is related to our ongoing research anddevelopment activities, including equipment which, subject to regulatoryapprovals, we intended to use for commercial manufacture of Imagify. Weconsider that this equipment is placed in service when operation of theequipment is started-up and begin depreciating the equipment at this time. Theequipment in our commercial manufacturing facility is currently undergoingresearch and development related activities that result in wear and tear on theequipment including include ongoing calibration and testing.

 

Leaseholdimprovements and equipment under capital leases are recorded at cost. Wedepreciate leasehold improvements and equipment under capital leases over thelesser of their useful lives or the remainder of their respective lease terms.We began 

 

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depreciation ofleasehold improvements at our Tewksbury facility in October 2005 uponreceipt of an occupancy permit and taking occupancy of the facility. Ourleasehold improvements costs on this facility approximate $30.7 million and arebeing depreciated ratably over remaining term of our present lease, the initialterm of which is scheduled in expire in April 2010. We believe that theuse of the initial term of the lease for the depreciation period, rather thanassuming that the lease term is renewed, is appropriate given the inherentuncertainties with a product such as Imagify, which has completed its phase 3clinical trials but still requires regulatory approvals before it can bemarketed.  The Risk Factors included under Section 1A of thisdocument discuss the uncertainties associated with Imagify.

 

*AccruedExpenses.*  As part of the process of preparing consolidated financial statements we arerequired to estimate accrued expenses. This process involves identifyingservices which have been performed on our behalf and estimating the level ofservice performed and the associated cost incurred for such service as of eachbalance sheet date in our consolidated financial statements. Examples ofestimated expenses for which we accrue include professional service fees, suchas lawyers and accountants, and contract service fees such as amounts paid toclinical monitors, data management organizations and investigators inconjunction with clinical trials, and fees paid to consultants used in thequalification of our commercial manufacturing facility for Imagify. Inconnection with such service fees, our estimates are most affected by ourunderstanding of the status and timing of services provided relative to theactual levels of services incurred by such service providers. The majority ofour service providers invoice us monthly in arrears for services performed. Inthe event that we do not identify certain costs which have begun to be incurredor we under- or over-estimate the level of services performed or the costs ofsuch services, our reported expenses for such period would be too low or toohigh. The date on which certain services commence, the level of servicesperformed on or before a given date and the estimate of cost of such services ata cutoff date are often judgmental. We make these judgments based upon thefacts and circumstances known to us in accordance with accounting principlesgenerally accepted in the United States of America.

 

*Stock-BasedCompensation and Other Equity Instruments.  * We account for stock-based compensationin accordance with the fair value recognition provisions of SFAS 123R, *Share-Based Payment*. Under SFAS 123R, stock-basedcompensation cost is measured at the grant date based on the fair value of theaward and is recognized as expense over the appropriate vesting period.Determining the fair value of stock-based awards at the grant date requiresjudgment, including estimating the expected term of stock options, the expectedvolatility of our stock and expected dividends. In addition, judgment isrequired in estimating the amount of stock-based awards that are expected to beforfeited. If actual results differ significantly from these estimates ordifferent key assumptions were used, it could have a material effect on ourConsolidated Financial Statements. See Note 3 of the Notes to theConsolidated Financial Statements for additional information regardingstock-based compensation expense.

 

Accounting forequity instruments granted or sold by us under APB No. 14, APB No. 25,SFAS 123 and EITF No. 96-18, such as the warrants issued inconjunction with certain sales of common stock, requires fair value estimatesof the equity instrument granted or sold. If our estimates of the fair value ofthese equity instruments are too high or too low, it would have the effect ofoverstating or understating expenses. When equity instruments are granted orsold in exchange for the receipt of goods or services and the value of thosegoods or services can be readily estimated, we use the value of such goods orservices to determine the fair value of the equity instruments. When equityinstruments are granted or sold in exchange for the receipt of goods orservices and the value of those goods or services can not be readily estimated,as is true in connection with most stock options and warrants granted toemployees or non-employees, we estimated the fair value of the equityinstruments based upon consideration of factors which we deemed to be relevantat the time using cost, market and/or income approaches to such valuations.

 

The fair values ofall stock option grants issued were determined using a Black-Scholes model inwhich we are required to make assumptions for the risk-free interest rate, theexpected volatility of the underlying stock, forfeiture rates and expected lifeof option grants.  The risk-free ratesare the weighted average of the yield rates on 5-year U.S. Treasury noteson the dates of the stock option grants. We used the historical volatility ofour market-traded stock for the expected volatility assumption. Forfeiturerates are calculated based on actual historical forfeitures.  The expected life of employee stock optionsrepresents the weighted-average period the stock options are estimated toremain outstanding. The expected life of employee stock options is, in part, afunction of the options’ remaining contractual life and the extent to which theoption is in-the-money (i.e., the average stock price during the period isabove the strike price of the stock option). We estimate that, based on thesevariables, options are likely on average to be exercised in approximately 5years from the date of grant.

 

*DerivativeLiabilities.  * The terms of our February 2005 convertible preferred stockoffering and our March 2005 MassDevelopment loan agreement containfeatures considered to be embedded derivatives which are recorded at estimatedfair value in accordance with SFAS 133. The estimation of this fair valueincludes various assumptions and estimates, including assumptions and estimatesof risk free interest rates, stock price volatility and the timing of futurepreferred stock conversions. Changes in these estimates and assumptions canincrease or decrease the value of this derivative liability.  Theunrealized gain or loss of the derivative financial 

 

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instrument isincluded in our statement of operations. The convertible preferred stock termsinclude a dividend make-whole payment provision, which has been initially recordedat its estimated fair value. This derivative liability is reduced uponconversion of the preferred stock as well as dividends declared by our board ofdirectors, if any. The MassDevelopment loan agreement includes a provision fora retroactive interest rate increase in the event that we achieve certaindefined positive operating cash flows. The initial fair value of theMassDevelopment loan derivative is being amortized over a term beginning withthe loan agreement effective date and ending with the estimated payment date ofthe retroactive interest. The fair value of both derivative liabilities arere-measured at each reporting period.

 

*IncomeTaxes.  *Deferred tax liabilities and assets are provided for differences between thebook and tax bases of existing assets and liabilities and tax losscarryforwards and credits, using tax rates expected to be in effect in theyears in which differences are expected to reverse. Valuation allowances areprovided to the extent realization of tax assets is not considered likely.

 

On January 1,2007 we adopted FASB Interpretation No. 48 (“FIN 48”), *Accounting for Uncertainty in Income Taxes — an Interpretation ofFASB Statement No. 109*, which clarifies the accounting foruncertainty in income tax positions. Under FIN 48, the impact of an uncertainincome tax position on the income tax return must be recognized at the largestamount that is more-likely-than-not to be sustained upon audit by the relevanttaxing authority. An uncertain income tax position will not be recognized if ithas less than a 50% likelihood of being sustained. Additionally, FIN 48provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.

 

There were no unrecognized tax benefits as of the date ofadoption January 1, 2007. As a result of the implementation of FIN 48, wedid not recognize an increase in the liability for unrecognized tax benefits.There are no unrecognized tax benefits included in the balance sheet thatwould, if recognized, affect the effective tax rate. The Company’s practice isto recognize interest and/or penalties related to income tax matters in incometax expense. We had no accrual for interest or penalties on our balance sheetsat December 31, 2007 and at March 31, 2008, and has not recognizedinterest and/or penalties in the statement of operations for the period ended December 31,2008.

 

**RecentlyIssued Accounting Pronouncements**

 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*, which iseffective for financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. The purpose of SFAS 157 isto clarify and set forth consistent rules for defining fair value,establishing a framework for measuring fair value in generally acceptedaccounting principles and expanding disclosures about fair value measurements. SFAS157 applies under other accounting pronouncements that require or permit fairvalue measurements where those accounting pronouncements have determined thatfair value is the relevant measurement attribute. SFAS 157 does not require anynew fair value measurements, but for some entities the application of SFAS 157could change current practice.  Except asdescribed below, we have adopted SFAS No. 157 on January 1, 2008. Theadoption of SFAS No. 157 did not have a material impact on our financialstatements or disclosures.

 

In February 2008, FASB issued FASB FSP FAS 157-2, *Effective Date of FASB Statement No. 157* (FSP 157-2).FSP 157-2 will provide a one-year deferral of the effective date of SFAS No. 157for non-financial assets and non-financial liabilities, except those that arerecognized or disclosed in financial statements at fair value at leastannually. For non-financial assets and non-financial liabilities subject to thedeferral, SFAS No. 157 will be effective in fiscal years beginning after November 15,2008 and in interim periods within those fiscal years. We are currentlyevaluating the impact that applying SFAS 157 to nonfinancial assets andliabilities will have on our consolidatedfinancial statements.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities,* which is effective as of the beginning of an entity’sfirst fiscal year beginning after November 15, 2007.  This statement allows the measurement at fairvalue of financial instruments and certain other items that are currently notrequired to be measured at fair value. The objective of SFAS 159 is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. The fair value option established by this Statement permits themeasurement of eligible items at fair value at specified election dates, withunrealized gains and losses on the items for which the fair value option hasbeen elected reported in earnings at each subsequent reporting date.  SFAS No. 159 was effective for us in thefirst quarter of 2008. The adoption of SFAS No. 159 did not have an impacton our financial statements or condition as we did not elect to use fair valuemeasurements on any assets or liabilities under this statement and have notsubsequently elected to carry any assets or liabilities at fair value.

 

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In June 2007,the Emerging Issues Task Force issued EITF 07-3, *Accountingfor Nonrefundable Advance Payments for Goods or Services Received for Use inFuture Research and Development Activities*, which is effective as of the beginning of an entity’s firstfiscal year beginning after December 15, 2007.  This abstract discusses the treatment of thenonrefundable portion of advance payments made pursuant to an executorycontractual arrangement for future research and development activities.  Nonrefundable advance payments for goods orservices that will be used or rendered for future research and developmentactivities should be deferred and capitalized. Such amounts should berecognized as an expense as the related goods are delivered or the relatedservices are performed. If an entity does not expect the goods to be deliveredor services to be rendered, the capitalized advance payment should be chargedto expense.  We adopted this statement asof January 1, 2008 and concluded it has no effect on our consolidatedfinancial statements.

 

In March 2008, the FASB issued SFAS No. 161, an amendment of SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities**,*which is effective as of the beginning of an entity’s first fiscal yearbeginning after November 15, 2008.  ThisStatement changes the disclosure requirements for derivative instruments andhedging activities, requiring enhanced disclosures about (a) how and whyan entity uses derivative instruments, (b) how derivative instruments andrelated hedged items are accounted for under Statement 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows.  We are assessing the impact, if any, of thispronouncement on our consolidated financial statements.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

We have not usedderivative financial instruments for speculative or trading purposes. However,we are exposed to market risk related to changes in interest rates. Our currentpolicy is to maintain an investment portfolio consisting mainly of U.S. moneymarket and government-grade securities, directly or through managed funds, withoriginal maturity dates of 90 days or less when purchased. Our cash isdeposited in and invested through highly rated financial institutions in NorthAmerica. Our cash equivalents are subject to interest rate risk and will fallin value if market interest rates increase. If market interest rates were to decreaseimmediately and uniformly by 10% from levels at March 31, 2008, weestimate that the fair value of our investment portfolio would decline by animmaterial amount.   Since our investmentportfolio consists of short-term, highly liquid investments, including moneymarket accounts, with original maturity dates of 90 days or less when purchased,we do not expect our operating results or cash flows to be affected to anysignificant degree by the effect of a change in market interest rates on ourinvestments. Our equipment loans and capital leases are not subject to interestrate fluctuations because the interest rates are fixed at the time ofborrowing.

 

**Effects of Inflation**

 

Our assets areprimarily monetary, consisting of cash, cash equivalents and short-terminvestments. Because of their liquidity, these assets are not directly affectedby inflation. We also believe that we have intangible assets in the value ofour technology. In accordance with generally accepted accounting principles, wehave not capitalized the value of this intellectual property on ourconsolidated balance sheet. Due to the nature of this intellectual property, webelieve that these intangible assets are not affected by inflation. Because weintend to retain and continue to use our equipment, furniture and fixtures andleasehold improvements, we believe that the incremental inflation related toreplacement costs of such items will not materially affect our operations.However, the rate of inflation affects our expenses, such as those for employeecompensation and contract services, which could increase our level of expensesand the rate at which we use our resources.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls andProcedures**

 

As of the end ofthe period covered by this report, our management, with the participation ofour Chief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgatedunder the Securities Exchange Act of 1934, as amended, or the Exchange Act.Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that, as of the evaluation date, our disclosure controls andprocedures were effective in ensuring that material information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms, includingensuring that such material information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosure.

 

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**Changes in Internal Control OverFinancial Reporting**

 

During the periodcovered by this report, there have been no changes in our internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

None

 

**ITEM 1A. RISK FACTORS**

 

**Certain Factors Which May AffectFuture Results**

 

*Ouroperating results and financial condition have varied in the past and may inthe future vary significantly depending on a number of factors. Except for thehistorical information in this report, the matters contained in this reportinclude forward-looking statements that involve risks and uncertainties. Thefollowing factors, among others, could cause actual results to differmaterially from those contained in forward-looking statements made in thisreport and presented elsewhere by management from time to time. Such factors,among others, may have a material adverse effect upon our business, results ofoperations and financial condition.*

 

*In Item 1A (“RiskFactors”) of our Annual Report on Form 10-K for the fiscal yearended December 31, 2007, which was filed with the Securities and Exchange Commission on March 17, 2008, wedescribe risk factors related to the Company.  For convenience, our updatedrisk factors are included below in this Item 1A.  Other than the risk factors titled:*

 

·                 *“Wehave not generated any product revenue to date, have a history of operatinglosses and our capital resources are limited. There is substantial doubt as to our ability to continue as a goingconcern.”*

 

·                 *“Weneed to allocate significant amounts of our available capital resources to makepayments on our outstanding indebtedness and equipment lease obligations, ourpatent transfer agreement with**Bayer Schering Pharma AG**,our patent license agreement with GE, our patent license agreement with Braccoand as dividends on our 6.5% convertible exchangeable preferred stock, which inturn could reduce our financial flexibility and ability to fund otheractivities.”*

 

·                 *“If sharesunder our universal shelf registration statement are issued, then the price ofour securities may be negatively affected.”*

 

*t**here have been nomaterial changes in our risk factors from those disclosed in Part II. Item1A of our Annual Report on Form 10-K for the fiscal year ended December 31,2007.*

 

**Risks Related to Our Company**

 

***We have notgenerated any product revenue to date, have a history of operating losses andour capital resources are limited.  Thereis substantial doubt as to our ability to continue as a going concern.***

 

We are focused onproduct development and we have not generated any revenue from commercial salesof our products to date. We have incurred losses each year of our operations.For the three months ended March 31, 2008, we had a net loss available toholders of common stock of $14.0 million.At March 31, 2008 we had an accumulated deficit of $348.4 million. Weexpect our research and development, general and administrative and sales andmarketing expenses will increase over the next several years.

 

We expect tocontinue to incur losses and capital expenditures for the foreseeable future.We also anticipate cash outflow from debt repayment and payment of otherobligations, including dividends payable on our outstanding shares of 6.5%convertible exchangeable preferred stock. Based on our operating plans, we willrequire significant additional capital to fund our operations beyond the end ofthe third quarter of 2008, including developing products, conducting clinicaltrials, achieving regulatory approvals, qualifying commercial manufacturingspace and, subject to regulatory approval, commercially launching Imagify, orother product candidates 

 

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under developmentor future product candidates. We may raise this additional capital throughpublic or private sales of equity, or from borrowings, or from strategicpartners.

 

As a result of ourlimited capital resources, we may elect to delay the funding of certaindevelopment activities, which would result in a delay in the approval and/orcommercialization of Imagify. Any such delay in approval and/orcommercialization of Imagify would have a material adverse impact on ourbusiness and would likely have a material adverse effect on the market price ofour common stock. To address our capital needs, we may elect to raise fundsthrough public or private sales of equity or from borrowings or from strategicpartners. Additional equity financing, if available, may be dilutive to ourstockholders; debt financing, if available, may involve significant cashpayment obligations and covenants that restrict our ability to operate ourbusiness; and strategic partnerships, if available, may result in royalties orother terms which reduce our economic potential from products underdevelopment. In addition, third parties may attempt to acquire us at valuationsour board of directors or stockholders may not find attractive.  Since our present capital resources are not sufficientto fund our planned operations for a twelve month period as of the date of thisAnnual Report on Form 10-K, our current financial resources raisesubstantial doubt about our ability to continue as a going concern.

 

We cannot assureyou that we can obtain additional funding on reasonable terms, or at all. If weraise additional funds by issuing equity securities, our stock price maydecline, our existing stockholders will experience significant dilution, andthe newly issued securities may have rights superior to those of our common stock.If we raise additional funds by issuing debt, we may be subject to limitationson our operations and such debt may have rights senior to the debentures, ifissued. If we cannot obtain adequate funds, we may:

 

· terminate or delay clinical trials forone or more of our product candidates;

 

· delay our establishment of sales,marketing and/or manufacturing capabilities;

 

· curtail significant product developmentprograms that are designed to identify new product candidates;

 

· relinquish rights to our technologies orproduct candidates;

 

· terminate or delay qualification of ourcommercial manufacturing facility; and/or

 

· terminate or delay development of one ormore of our product candidates, including Imagify, and discontinue operationsof all or a portion of our operations.

 

***We need to allocate significant amounts of our availablecapital resources to make payments on our outstanding indebtedness andequipment lease obligations, our patent transfer agreement with******Bayer Schering Pharma AG******, ourpatent license agreement with GE, our patent license agreement with Bracco andas dividends on our 6.5% convertible exchangeable preferred stock, which inturn could reduce our financial flexibility and ability to fund otheractivities.***

 

As of May 5,2008, we had approximately $15.8 million in aggregate principal indebtednessoutstanding related to capital lease obligations, notes payable, accrueddividends and other long-term obligations.****As of May 5,2008, we had outstanding 650,000 shares of our 6.5% convertible exchangeablepreferred stock, which shares accrue cumulative cash dividends at the annualrate of $3.25 per share, payable quarterly on the first day of March, June,September, and December. These payments will:

 

·                  reduce the availability of our capital to fund ourclinical trials for Imagify, the qualification of our commercial manufacturingspace in Tewksbury, Massachusetts and for working capital and other generalcorporate purposes and may require us, in order to meet these obligations, todelay or reduce expenditures or forego business opportunities; and

 

·                  potentially impair our ability to obtain additionalfinancing.

 

To address ourcapital needs, we may elect to raise funds through public or private sales ofequity or from borrowings or from strategic partners. Additional equityfinancing, if available, will be dilutive to our stockholders; debt financing,if available, may involve significant cash payment obligations and covenantsthat restrict our ability to operate as a business; and strategic partnerships,if available, may result in royalties or other terms which reduce our economicpotential from products under development.

 

***Failure to obtain regulatory approvals for our productcandidates under development, in particular our lead product candidate******Imagify, for which wemissed endpoints in each of our pivotal trials******,would have a material adverse effect on our business.***

 

We must receiveregulatory approval of each of our product candidates before we cancommercialize or sell that product candidate. The pre-clinical laboratorytesting, formulation development, manufacturing and clinical trials of anyproduct candidates we develop independently or in collaboration with thirdparties, as well as the distribution and marketing of these product candidates,are regulated by numerous federal, state and local governmental authorities inthe United States, principally FDA, and by similar agencies in other 

 

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countries. Thedevelopment and regulatory approval process takes many years, requires theexpenditure of substantial resources, is uncertain and subject to delays, andcould thus delay our receipt of revenues, if any, from any of our productcandidates.

 

The data obtainedfrom clinical and pre-clinical activities are subject to varyinginterpretations that could delay, limit or prevent regulatory agency approval.In particular, we can not assure you that the NDA for Imagify will be acceptedby FDA nor can we assure you that our Imagify clinical results willsuccessfully address FDA requirements sufficiently for us to obtain regulatoryapproval. No product can receive FDA approval unless human clinical trials showboth safety and efficacy for each target indication in accordance with FDAstandards. FDA analysis of results include both quantitative and qualitativeanalysis. In both our RAMP-1 and RAMP-2 clinical trial results, we achieved theprincipal primary endpoint of accuracy but failed to achieve one of the twocomponent primary endpoints in each trial (sensitivity in RAMP-1 andspecificity in RAMP-2).  The FDA may lookat these trials separately rather than in their totality and may not approveImagify based upon these missed endpoints. We cannot predict whether FDA willapprove Imagify based upon the available results or whether FDA will seekadditional data as a condition to approval or whether they will approve Imagifyat all.

 

Our RAMP-1 andRAMP-2 clinical trial results are based upon our statistical analysis plans forthose trials. These statistical analysis plans, including calculations ofstatistical significance, were created based on a variety of factors, includingfeedback from our discussions with FDA, the input of our regulatory consultantsand our own knowledge and past experience in these and similar matters. Weanticipate that the FDA will evaluate the quality and independence of themanner in which our Imagify clinical trials were conducted. In recent years,other companies seeking approval for their contrast agents have encountereddifficulties convincing FDA that the comparative or truth standards that theyused in their clinical trials met acceptable levels of quality, consistency orother standards acceptable to the FDA. In such cases, these issues werereported to be contributing factors in the failure of such product candidatesto be approved. If the FDA, upon review, has concern about the manner in whichour RAMP-1 or RAMP-2 trials were conducted, or has concerns about the resultsof the nuclear stress tests or coronary angiography used as a comparator andtruth standard in these trials, this could delay or prevent FDA approval ofImagify based upon our current trial results. There can be no assurance thatFDA will accept our statistical analysis without modification.  How, when, or if such matters are resolvedmay affect whether Imagify is approved for the indication that we are seeking,the timing of such approval, or whether Imagify is approved at all.   In addition, in conjunction with approvingproducts, it is common for regulatory agencies to impose limits on how suchproducts can be used and marketed.  We anticipate that if and when Imagifyand other product candidates are approved that the initial use and marketing ofthese products may be limited at least until such time as we conduct additionalclinical studies or information otherwise becomes available to address theunderlying reasons for such limitations.

 

We may encounterdelays or rejections based on changes in regulatory agency policies orpersonnel during the period in which we develop a drug or the period requiredfor review of any application for regulatory agency approval of a particularcompound. Our continuing efforts to comply with these changes could lead todelays or rejections of our clinical trials. We also may encounter delays inthe event we are unable to produce clinical trial material in sufficientquantities and of sufficient quality to meet the schedule for our plannedclinical trials. In addition, we rely on a number of third parties, such asclinical research organizations, to help support the clinical trials byperforming independent clinical monitoring, data acquisition and dataevaluations. Any failure on the part of these third parties could delay theregulatory approval process.

 

Failure to obtainregulatory approval or any delay or setback in obtaining regulatory agencyapprovals could:

 

· adversely affect our ability to marketany drugs we develop independently or with collaborative partners;

 

· impose additional costs and diminish anycompetitive advantages that we may attain; or

 

· adversely affect our ability to generateroyalties.

 

Failure to obtainapproval for our lead product candidate, Imagify, or delay in such approval,would delay our receipt of product revenues and would have a material adverseaffect our business, financial condition and results of operations.  Our stock price would also be materiallyadversely affected.

 

***Adverseevents are likely to be encountered in our clinical trials and these eventscould delay, limit or prevent regulatory approval.***

 

Many of thepatients in our Imagify clinical trials have coronary artery disease. As partof our Imagify clinical trials, patients are exposed to potential safety risksassociated with a stress test, including risks associated with a pharmacologicalstressor, and Imagify. Given the nature of the Imagify clinical trials,including the cumulative administration of Imagify to larger numbers of at-riskpatients and administering Imagify to patients with coexisting disease, adverseevents are expected to be encountered during any future clinical trials.Adverse events are also likely to be encountered in clinical trials for ourother products, which clinical trials may also include 

 

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at-risk patients.When significant adverse events are detected and these events are attributableto our products, such events could delay, limit or prevent regulatory agencyapproval.

 

***FDA has required warning labels be added to product labelingfor certain contrast agents as a result of serious adverse events and, ifapproved, our Imagify product candidate may require similar labeling.***

 

FDA is investigating reports of deaths andheart problems in patients treated with contrast agents and as a result, hasrequired warning labels to be added to product labeling for certain ultrasoundcontrast agents which are approved for use in clinically unstable and acutelyill patients. TheseFDA-approved agents, Optison, marketed by GE Healthcare and Definity, marketedby Lantheus Medical Imaging, are injected into patients prior to a cardiac ultrasound toimprove visibility of the image. While we believe that Imagify is structurallydifferent from these commercially-available ultrasound contrast agents, wecannot assure you that, if approved, Imagify will not be required to carry asimilar warning.  As a result, thepotential market size may be significantly smaller.

 

***Ourcollaborative partners may not obtain regulatory approvals in other countries,which may have an adverse effect on our business.***

 

We cannot becertain that we or our partners will obtain any regulatory approvals in othercountries and the failure to obtain these approvals would have a materialadverse affect on our business, financial condition and results of operations.In order to market our products outside of the United States, we and ourcurrent, and potential future, collaborative partners must establish and complywith numerous and varying regulatory requirements of other countries regardingsafety and efficacy. The approval procedures vary among countries and caninvolve additional product testing and additional administrative reviewperiods. The time required to obtain approval in other countries might differfrom that required to obtain FDA approval. The regulatory approval process inother countries may include all of the risks associated with obtaining FDAapproval detailed above. Approval by FDA does not ensure approval by theregulatory authorities of other countries. In addition, many countries outsidethe United States require a separate review process prior to marketing todetermine whether their national health insurance schemes will pay for newlyapproved products, as well as the price which may be charged for a product.

 

***We may need to enroll more patients in future clinicaltrials, and any such additional enrollment would require additionalexpenditures, which may be material, and would likely result in a delay ofultimate approval of the NDA for******Imagify******.***

 

If discussionswith FDA lead us to conclude that further clinical trials of Imagify arerequired to achieve NDA approval, such trials may affect the timing of suchultimate approval and we would incur significant additional costs.  We cannot assure that the performance ofadditional trials would lead ultimately to NDA approval.  Moreover, we currently do not possesssufficient inventory of Imagify to conduct any such trial, and would need tocontract for the manufacture of such material. We may not be able to obtain sufficient quantity of such material in atimely fashion or on commercially reasonable terms, or at all.  Our inability to conduct additional clinicaltrials for Imagify in a timely fashion, or at all, resulting from of ourinability to manufacture or obtain clinical trial materials would have materialadverse effect on our business.

 

***If we cannot raise additional capital on acceptable terms,we may be unable to complete planned clinical trials, obtain regulatoryapprovals or commercialize our product candidates.***

 

We will requiresubstantial future capital in order to continue to conduct the research anddevelopment, clinical and regulatory activities necessary to bring our productcandidates to market and to establish commercial manufacturing, marketing andsales capabilities. Our future capital requirements will depend on manyfactors, including the:

 

· progress of pre-clinical development andlaboratory testing and clinical trials;

 

· timing of construction and size to whichwe expand our manufacturing capabilities;

 

· time and costs involved in obtainingregulatory approvals;

 

· number of product candidates we pursue;

 

· costs involved in filing and prosecutingpatent applications and enforcing or defending patent claims; and

 

· establishment of selected strategicalliances and activities required for product commercialization.

 

We may seekadditional funding through strategic collaborations or through private orpublic sales of our securities or by licensing all or a portion of ourtechnology. This funding will significantly dilute existing stockholders or maylimit our rights to our technology.  Anyof these could have a material adverse effect on our business, financialcondition and results of operations.  Ourstock price could also be materially adversely affected.

 

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***Our products, ifapproved, may fail to achieve market acceptance.***

 

There can be noassurance that any products we successfully develop, if approved for marketing,will achieve market acceptance or generate significant revenues. Each of ourproduct candidates is intended to replace or alter existing therapies orprocedures, and hospitals, physicians or patients may conclude that theseproducts are less safe or effective or otherwise less attractive than theseexisting therapies or procedures. For example, our lead product candidate,Imagify, is a cardiovascular drug for use in ultrasound imaging procedureswhich will compete with existing nuclear imaging and cardiac ultrasound.Hospitals, physicians or patients may prefer these existing procedures toImagify perfusion stress ultrasound imaging. If our products do not receivemarket acceptance for any reason, it would adversely affect our business,financial condition and results of operations. In such event, we may elect to conduct additional clinical trialsdesigned to demonstrate the effectiveness of Imagify in circumstances notstudied in our Phase 3 clinical trials. Any such studies will likely be expensive and time consuming. Further, ourcompetitors may develop new technologies or products that are more effective orless costly, or that seem more cost-effective, than our products. We can giveno assurance that hospitals, physicians, patients or the medical community ingeneral will accept and use any products that we may develop.

 

***We have never manufactured any of our product candidates incommercial quantities, and if we fail to develop an effective manufacturingcapability for our products, including our lead product candidate******Imagify******, wemay be unable to commercialize these products.***

 

We have noexperience in manufacturing our products for commercial use and limitedexperience in designing equipment for the manufacture of our products. We areworking to qualify operations at a commercial manufacturing facility inTewksbury, Massachusetts and to demonstrate that we can produce Imagify at acommercial manufacturing scale, and subject to required regulatory approvals,we intend to manufacture Imagify in this facility for commercial use. We cannot assure you that we will be able to obtain the necessary regulatoryapprovals for such commercial manufacture, at all or in a timely or economicalmanner. Our intention to manufacture Imagify or other products exposes us tothe following risks, any of which could delay or prevent the approval of ourproducts by FDA or corresponding state and foreign agencies, or thecommercialization of our products, or result in higher costs or inability tomeet demand for Imagify leading to potential revenue loss, and any of whichwould have a material adverse impact on our business, financial condition andresults of operations.

 

· Manufacturers are obliged to manufacturein highly controlled environments and to operate in accordance with FDA andinternational mandated current good manufacturing practices, or cGMPs. For ourclinical trials we have relied on contract manufacturers for such facilitiesand cGMP compliance. Creation and qualification of a commercial manufacturingenvironment requires significant expertise and capital resources, including thedevelopment of advanced manufacturing techniques and process controls and issubject to local and state planning approvals. Manufacturers of pharmaceuticalproducts often encounter difficulties in constructing and qualifying newmanufacturing facilities and in production, especially in scaling-up initialproduction. A failure to establish and follow cGMPs and to document adherenceto such practices may lead to significant delays in the availability ofmaterial for commercial production for Imagify and may delay or prevent filingor approval of marketing applications for our products or the ability tocontinue to manufacture the products. Certain of these delays would furtherrequire us to continue to operate this facility and incur related costs.

 

· Manufacture of our product candidates,in preparation for commercial production, will each initially require and relyon a single commercial manufacturing site, directly or through a contractmanufacturer, without the backup of a second site that is qualified forcommercial manufacture of the product. Qualification of another manufacturingsite can be expensive and time consuming. Prior to using product from a newmanufacturing site, we must demonstrate to FDA and corresponding state andforeign agencies that the specifications for the product are consistent withthe specifications for the product as it was manufactured at a prior qualifiedsite or we must clinically or otherwise demonstrate that the safety andefficacy of the product produced in the new manufacturing site is consistentwith the product as it was manufactured at the prior site. Demonstrating suchconsistency may be difficult, expensive or time consuming. In addition, beforewe would be able to produce product for commercial use at a new facility, itwill have to undergo a pre-approval inspection by FDA and corresponding stateand foreign agencies. Once approved, drug manufacturers are subject to ongoingperiodic unannounced inspection by FDA and corresponding state and foreignagencies to ensure strict compliance with cGMPs, other government regulationsand corresponding foreign standards. Failure to maintain compliance with cGMPor with safety or environmental regulations could result in penalties, productrecalls or restrictions on the use of the manufacturing site.

 

We have a singlemanufacturing facility. This facility and the manufacturing equipment we use toproduce Imagify would be difficult to replace and could require substantiallead-time to repair or replace in the event of a regulatory, manufacturing,catastrophic event or 

 

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similar problem.In such event, we would be forced to rely on third-party manufacturers andthere would likely be substantial delay before we would be able to restart production.Although we possess insurance for damage to our property and the disruption ofour business from casualties, such insurance may not be sufficient to cover allof our potential losses, including potential damage to our reputation, and maynot continue to be available to us on acceptable terms, or at all. In addition,future growth may outpace our manufacturing capacity, in which event we wouldneed to locate, obtain and build-out additional space. New or alternativefacilities may not be available to us on acceptable terms. Even if we are ableto identify such new or alternative facilities, we may incur additional costsand we may experience a disruption in the supply of our products until thosefacilities are available.

 

***Failure to manufacture our products in commercial quantitiesor at commercially reasonable rates could damage our European partnership.***

 

Under the terms ofour collaboration agreement with Nycomed, we are responsible for the commercialmanufacture of Imagify for marketing and sale by Nycomed in Europe. Failure tomanufacture Imagify in a timely manner or on an economic basis, or insufficient quantities, could jeopardize our relationship with Nycomed. We donot currently have a European sales force, nor do we have experience with regardto the commercialization, marketing, sale or distribution of pharmaceuticalproducts in Europe, and we rely entirely on Nycomed for this expertise. Anytermination of our relationship with Nycomed would have a material adverseimpact on our business, financial condition and results of operations.

 

***We may not be ableto manufacture our products in commercial quantities, which would prevent usfrom marketing our products.***

 

To date ourproduct candidates have been manufactured in small quantities for pre-clinicaland clinical trials. If any of these product candidates are approved by FDA orforeign regulatory authorities for commercial sale, we will need to manufacturethem in larger quantities. For Imagify, we are seeking regulatory approvalafter we have demonstrated that we can manufacture Imagify at a larger batchscale than is being used for clinical trial materials. However, manufacturersoften encounter difficulties in achieving volume production, quality controland quality assurance and we might not be able to manufacture sufficientquantities of drugs to meet our clinical schedules or to commercialize ourproducts.  We cannot assure you that wewill be able to successfully increase the manufacturing capacity or manufactureat a larger batch scale, whether on our own or in collaboration with thirdparty manufacturers, for any of our product candidates in a timely or economicmanner, or at all. Significant scale-up of manufacturing may require certainadditional validation studies, which FDA must review and approve. If we areunable to successfully increase the manufacturing capacity for a productcandidate, the regulatory approval or commercial launch of that productcandidate may be delayed or there may be a shortage in supply of that productcandidate. Our product candidates require precise, high-quality manufacturing.Our failure to achieve and maintain these high manufacturing standards,including controlling the incidence of manufacturing errors and maintainingreliable product packaging for diverse environmental conditions, could resultin patient injury or death, product recalls or withdrawals, delays or failuresin product testing or delivery, cost overruns or other problems that couldseriously hurt our business.

 

Our commercialmanufacturing facility in Tewksbury, Massachusetts is designed to meet ourestimated initial commercial demand for Imagify. The facility is beinginitially equipped to run one production line. In order to support greaterproduction capacity, this production line is designed to support a largerlyophilizer (pharmaceutical freeze dryer which can be operated under sterileconditions) in addition to the one that has been initially installed.Purchasing, installing and qualifying manufacturing equipment, such as alyophilizer, typically requires significant lead times and temporarydiscontinuation of production. Also in the future we may need to add additionalproduction lines at the Tewksbury site or elsewhere to meet potentialcommercial demand for Imagify. We have made no commitment to such additions atthis time. The cost of such additions can be significant. There can be noassurance that our capacity estimates will be achieved. Any such additionswould increase our operating spending, increase our capital requirements and reduceour resources available for development activities.

 

***We have removed our******Imagify******manufacturing equipment from the facilities of our third party contractmanufacturer and currently have no facility within which to manufacture******Imagify******untilthe new commercial manufacturing facility is qualified or until otherarrangements are made.***

 

We have removedour Imagify manufacturing equipment from the facilities of a third-partycontract manufacturer.  Currently, wehave no facility within which to manufacture Imagify until the new commercialmanufacturing facility is qualified or until other arrangements are made. Wehave no existing inventory of Imagify on-hand and would need to produce, orcontract with a third party for the production of additional material forfuture clinical trials. If we are not able to secure sufficient inventory ofImagify clinical trial material to perform clinical trials, our program couldbe adversely impacted or delayed. These delays could have a material adverseeffect on our business, financial condition and results of operations.

 

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***If third-party manufacturers of our products candidates failto devote sufficient time and resources to our concerns, or if theirperformance is substandard, our clinical trials may be delayed and our costsmay rise.***

 

We may relysubstantially on third-party contract manufacturers to supply, store anddistribute our product candidates for our clinical trials and other developmentneeds. Our reliance on these third-party manufacturers will expose us to thefollowing risks, any of which could delay or prevent the completion of ourclinical trials, the approval of our products by FDA, or the commercializationof our products, result in higher costs, or deprive us of additional productcandidates, and any of such effects would have a material adverse impact on ourbusiness, financial condition and results of operations.

 

· Contract manufacturers often encounterdifficulties in achieving volume production, quality control and qualityassurance, as well as shortages of qualified personnel. Accordingly, amanufacturer might not be able to manufacture sufficient quantities of drugs tomeet our clinical schedules.

 

· Contract manufacturers are obliged tooperate in accordance with FDA-mandated current good manufacturing practices,or cGMPs. A failure of these contract manufacturers to establish and followcGMPs and to document their adherence to such practices may lead to significantdelays in the availability of material for clinical study and may delay orprevent filing or approval of marketing applications for our products.

 

· For production of clinical trialmaterial for each of our current product candidates we will initially rely on asingle manufacturer. Changing these or future manufacturers may be difficultand the number of potential manufacturers is limited. Changing manufacturersmay require re-validation of the manufacturing processes and procedures inaccordance with FDA-mandated cGMPs. Such re-validation may be costly andtime-consuming. It may be difficult or impossible for us to find replacementmanufacturers on acceptable terms quickly, or at all.

 

· Our contract manufacturers may notperform as agreed or may not remain in the contract manufacturing business forthe time required to produce, store and distribute our products successfully.Our manufacturing levels, while important to us, can represent relatively smallfractions of the overall business of most qualified contract manufacturers. Asa result, the contract manufacturers may not provide us with the attention thatwe need or may be unwilling to adapt to necessary changes in our manufacturingrequirements.

 

Drug manufacturersare subject to ongoing periodic unannounced inspection by FDA and correspondingstate and foreign agencies to ensure strict compliance with cGMPs, othergovernment regulations and corresponding foreign standards. While we areobligated to audit the performance of third party contractors, we do not havecontrol over our third-party manufacturers’ compliance with these regulationsand standards. Failure by our third-party manufacturers or us to comply withapplicable regulations could result in sanctions being imposed on us, includingfines, injunctions, civil penalties, failure of the government to grant marketapproval of drugs, delays, suspension or withdrawal of approvals, seizures orrecalls of product, operating restrictions and criminal prosecutions, any ofwhich could significantly and adversely affect our business.

 

***Materials necessary to manufacture our products may not beavailable, which may delay our development and commercialization activities.***

 

Only a fewfacilities manufacture some of the raw materials necessary to manufacture ourproducts. If we need to purchase a raw material that is in limited supply orbecomes unavailable for our clinical trials, or for commercial distribution ifwe obtain marketing approval of a product candidate, we cannot assure you thatsuppliers would be able to sell us that raw material at the time we need it andon commercially reasonable terms. If we change suppliers for any of these materialsor any of our suppliers experiences a shutdown or disruption in the facilitiesused to produce these materials, due to technical, regulatory or otherproblems, it could harm our ability to manufacture our products or receiveregulatory approval.

 

***We have noexperience selling, marketing or distributing our products and no internalcapability to do so.***

 

If we receiveregulatory approval to commence commercial sale of any product, we will facecompetition with respect to commercial sales, marketing and distribution. Theseare areas in which we have no experience. To market any of our productsdirectly, we must develop a direct marketing and sales force with technicalexpertise and supporting distribution capability. Alternatively, we may engagea pharmaceutical or other healthcare company with an existing distributionsystem and direct sales force to assist us. There can be no assurance that wewill successfully establish sales and distribution capabilities either on ourown or in collaboration with third 

 

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parties or gainmarket acceptance for our products. To the extent we have or will enterco-promotion or other licensing arrangements, any revenues we receive willdepend on the efforts of third parties and there can be no assurance that ourefforts will succeed.

 

***Our potentialproduct trade names may not be acceptable to FDA.***

 

FDA reserves theright to approve product names prior to commercialization.  We have proposed to FDA the tradenameImagify, as well as an alternative tradename, as a potential product trade namefor our lead product.  FDA has raisedconcerns regarding the name Imagify which, if not resolved, could cause us touse the alternative name which FDA finds acceptable.  Trade names changes could result inadditional cost to us and could adversely affect our preparations forcommercialization of this product which could, in turn, adversely affect ourbusiness, financial condition and results of operations.

 

***Claims by other parties that we infringe or havemisappropriated their proprietary technology may result in liability fordamages, royalties, or other payments, or stop our development andcommercialization efforts.***

 

Competitors andother third parties may initiate patent litigation against us in the UnitedStates or in foreign countries based on existing patents or patents that may begranted in the future. Many of our competitors have obtained patents coveringproducts and processes generally related to our products and processes, and theymay assert these patents against us. Moreover, there can be no assurance thatthese competitors have not sought or will not seek additional patents that maycover aspects of our technology. As a result, there is a greater likelihood ofa patent dispute than would be expected if our competitors were pursuingunrelated technologies.

 

While we conductpatent searches to determine whether the technologies used in our productsinfringe patents held by third parties, numerous patent applications arecurrently pending and may be filed in the future for technologies generallyrelated to our technologies, including many patent applications that remainconfidential after filing. Due to these factors and the inherent uncertainty inconducting patent searches, there can be no guarantee that we will not violatethird-party patent rights that we have not yet identified.

 

We know of U.S.and foreign patents issued to third parties that relate to aspects of ourproduct candidates. There may also be patent applications filed by these orother parties in the United States and various foreign jurisdictions thatrelate to some aspects of our product candidates, which, if issued, couldsubject us to infringement actions. In particular, we are aware of U.S. andforeign patents owned by third parties, including potential competitors, whicharguably cover aspects of our Imagify contrast agent. We and several of theseparties have been actively engaged in opposing the grant of European patentswith claims that arguably cover aspects of our Imagify product. Parties maycontest patents in Europe prior to contesting the counterpart patents in theUnited States because of procedural differences between European and U.S.patent laws as well as economic considerations.

 

The owners or licenseesof these and other patents may file one or more infringement actions againstus. In addition, a competitor may claim misappropriation of a trade secret byan employee hired from that competitor. Any such infringement ormisappropriation action could cause us to incur substantial costs defending thelawsuit and could distract our management from our business, even if theallegations of infringement or misappropriation are unwarranted. A need todefend multiple actions or claims could have a disproportionately greaterimpact. In addition, either in response to or in anticipation of any suchinfringement or misappropriation claim, we may enter into commercial agreementswith the owners or licensees of these rights. The terms of these commercialagreements may include substantial payments, including substantial royaltypayments on revenues received by us in connection with the commercialization ofour products. Payments under such agreements could increase our operatinglosses and reduce our resources available for development activities.Furthermore, a party making this type of claim could secure a judgment thatrequires us to pay substantial damages, which would increase our operatinglosses and reduce our resources available for development activities. Ajudgment could also include an injunction or other court order that couldprevent us from making, using, selling, offering for sale or importing ourproducts or prevent our customers from using our products. If a courtdetermined or if we independently concluded that any of our products ormanufacturing processes violated third-party proprietary rights, our clinicaltrials could be delayed and there can be no assurance that we would be able toreengineer the product or processes to avoid those rights, or to obtain alicense under those rights on commercially reasonable terms, if at all.

 

***If we are unable to protect our intellectual propertyrights, our competitors may develop and market products with similar featuresthat may reduce demand for our products, and we may be prevented fromestablishing collaborative relationships on favorable terms.***

 

The followingfactors are important to our success:

 

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· receiving patent protection for ourproduct candidates;

 

· maintaining our trade secrets;

 

· not infringing on the proprietary rightsof others; and

 

· preventing others from infringing ourproprietary rights.

 

We will be able toprotect our proprietary rights from unauthorized use by third parties only tothe extent that our proprietary rights are covered by valid and enforceablepatents or are effectively maintained as trade secrets.

 

We try to protectour proprietary position by filing U.S. and foreign patent applications relatedto our proprietary technology, inventions and improvements that are importantto the development of our business. Because the patent position ofpharmaceutical companies involves complex legal and factual questions, theissuance, scope and enforceability of patents cannot be predicted withcertainty. Patents, if issued, may be challenged, invalidated or circumvented.Thus, any patents that we own or license from others may not provide anyprotection against competitors. Our pending patent applications, those we mayfile in the future, or those we may license from third parties, may not resultin patents being issued. If issued, they may not provide us with proprietaryprotection or competitive advantages against competitors with similartechnology. Furthermore, others may independently develop similar technologiesor duplicate any technology that we have developed. The laws of many foreigncountries do not protect our intellectual property rights to the same extent asdo the laws of the United States.

 

We also rely ontrade secrets, know-how and technology, which are not protected by patents, tomaintain our competitive position. We try to protect this information byentering into confidentiality agreements with parties that have access to it,such as our corporate partners, collaborators, employees and consultants. Anyof these parties may breach the agreements and disclose our confidentialinformation or our competitors might learn of the information in some otherway. If any trade secret, know-how or other technology not protected by a patentwere to be disclosed to or independently developed by a competitor, ourbusiness and financial condition could be materially adversely affected.

 

***We may become involved in lawsuits and administrativeproceedings to protect, defend or enforce our patents that would be expensiveand time consuming.***

 

In order toprotect or enforce our patent rights, we may initiate patent litigation againstthird parties in the United States or in foreign countries. In addition, wehave been and continue to be subject to certain opposition proceedingsconducted in patent and trademark offices challenging the validity of ourpatents and may become involved in future opposition proceedings. The defenseof intellectual property rights, including patent rights through lawsuits,interference or opposition proceedings, and other legal and administrativeproceedings can be costly and can divert our technical and management personnelfrom their normal responsibilities. Such costs increase our operating lossesand reduce our resources available for development activities. An adversedetermination of any litigation or defense proceedings could put one or more ofour patents at risk of being invalidated or interpreted narrowly and could putour patent applications at risk of not issuing.

 

Furthermore,because of the substantial amount of discovery required in connection withintellectual property litigation, there is a risk that some of our confidentialinformation could be compromised by disclosure during this type of litigation.For example, during the course of this kind of litigation and despiteprotective orders entered by the court, confidential information may beinadvertently disclosed in the form of documents or testimony in connectionwith discovery requests, depositions or trial testimony. This disclosure couldmaterially adversely affect our business and financial results.

 

***If we are unable to retain key personnel and hire additionalqualified scientific, manufacturing, sales and marketing, and other personnel,we may not be able to successfully achieve our goals.***

 

We depend on theprincipal members of our scientific and management staff. The loss of theseprincipal members’ services might significantly delay or prevent theachievement of research, development or business objectives and couldmaterially adversely affect our business, financial condition and results ofoperations. We do not maintain key person life insurance on any of theseprincipal members, except for the CEO.  We have entered into executiveemployment agreements, as amended, with key members of the management team thatprovide for compensation and other benefits in the event these persons areterminated other than for cause, including in connection with a “change ofcontrol” of Acusphere, or if they terminate their employment for good reason.

 

Our successdepends, in large part, on our ability to attract and retain qualifiedscientific and management personnel such as these individuals. We face intensecompetition for such personnel and consultants. We cannot assure you that wewill attract and retain qualified management and scientific personnel in thefuture.

 

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Further, we expectthat our potential expansion into areas and activities requiring additionalexpertise, such as further clinical trials, governmental approvals, commercialmanufacturing and marketing, will place additional requirements on ourmanagement, operational and financial resources. We expect these demands willrequire an increase in management and scientific personnel and the developmentof additional expertise by existing management personnel. The failure toattract and retain such personnel or to develop such expertise could materiallyadversely affect prospects for our success.

 

***We will establishcollaborative relationships, and those relationships may expose us to a numberof risks.***

 

We will rely on anumber of significant collaborative relationships with pharmaceutical or otherhealthcare companies for our manufacturing, research funding, clinicaldevelopment and/or sales and marketing performance. Reliance on collaborativerelationships poses a number of risks, including the following:

 

·we cannot effectively controlwhether our corporate partners will devote sufficient resources to our programsor product candidates;

 

·disputes may arise in the futurewith respect to the ownership of rights to technology developed withcollaborators;

 

·disagreements with collaboratorscould delay or terminate the research and development, regulatory approval orcommercialization of product candidates, or result in litigation orarbitration;

 

·corporate partners may haveconsiderable discretion in electing whether to pursue the development of anyadditional product candidates and may pursue technologies or products either ontheir own or in collaboration with our competitors; and

 

·collaborators with marketing rightsmay choose to devote fewer resources to the marketing of our product candidatesthan they do to product candidates of their own development.

 

In July 2004,we entered into a collaboration, license and supply agreement with Nycomed inwhich we granted Nycomed rights to develop and market Imagify in Europe. Therecan be no assurance that the regulatory goals, sales targets and otherobjectives of this agreement will be achieved. Failure to achieve these goals,targets and objectives would result in our inability to receive license,milestone, royalty and other payments under this agreement, which would have amaterial adverse impact on our business, financial condition and results ofoperations including, under certain conditions, reduction of royalty rates,delays in regulatory approvals and product sales, penalties and termination ofthe agreement. Under certain provisions of this collaboration agreement, if wefail in any material respect to use all commercially reasonable efforts tocarry out referenced obligations under the agreement, we would be obligated topay Nycomed liquidated damages of up to $12 million. Although we plan tocarry out all of these obligations, which we believe are in our control, therecan be no assurance that termination of this agreement will not occur or thatsuch termination would not result in us incurring liquidated damages of up to$12 million.

 

Given these risks,our current and future collaborative efforts may not be successful. Failure ofthese efforts could delay our product development or impair commercializationof our products, and could have a material adverse effect on our business,financial condition and results of operations.

 

***Competition in thepharmaceutical industry is intense, and if we fail to compete effectively ourfinancial results will suffer.***

 

We engage in abusiness characterized by extensive research efforts, rapid developments andintense competition. We cannot assure you that our products will competesuccessfully or that research and development by others will not render ourproducts obsolete or uneconomical. Our failure to compete effectively wouldmaterially adversely affect our business, financial condition and results ofoperations. We expect that successful competition will depend, among otherthings, on product efficacy, safety, reliability, availability, timing andscope of regulatory approval and price. Specifically, we expect importantfactors will include the relative speed with which we can develop products,complete the clinical, development and laboratory testing and regulatoryapproval processes and supply commercial quantities of the product to themarket.

 

We expectcompetition to increase as technological advances are made and commercialapplications broaden. In commercializing our initial product candidates and anyadditional products we develop using our HDDS and PDDS technologies, we willface substantial competition from large pharmaceutical, biotechnology and othercompanies, universities and research institutions.

 

· Imagify, our cardiovascular drug andlead product candidate, if approved for marketing and sale, will compete withnuclear stress tests, the current standard of care in myocardial perfusionimaging. Nuclear imaging agents that are approved for use in myocardialperfusion imaging include products marketed by GE Healthcare and LantheusMedical Imaging. In 2005, the reimbursement rate of a nuclear stress test was approximately$800 per procedure. In addition, GE Healthcare and Lantheus 

 

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Medical Imaging have developed and marketed ultrasound contrast agentsthat have been used for Left Ventricular Opacification, or LVO, and EndocardialBorder Delineation, or EBD, in patients with suboptimal images. No ultrasoundcontrast agent has been approved by FDA for use in myocardial perfusion imagingusing cardiac stress ultrasound. However, we are aware of other companies thatare or may be developing ultrasound imaging agents for use in cardiac stressultrasound. CardioSphere, which is being developed by Point BiomedicalCorporation, is a cardiac stress ultrasound imaging agent for the assessment ofmyocardial perfusion.  It is ourunderstanding that Point Biomedical Corporation is conducting clinical trialsin order to potentially gain regulatory approval for CardioSphere.  In addition, some companies have ultrasoundcontrast agents that are FDA approved for resting cardiac ultrasound evaluationof LVO and EBD in patients with suboptimal images or are in development. In thefuture, these companies may seek to broaden their indications to includemyocardial perfusion assessment with cardiac stress ultrasound. These FDA-approvedagents include Optison, which is marketed by GE Healthcare and Definity, whichis marketed by Lantheus Medical Imaging. SonoVue is an ultrasound contrastagent marketed in Europe by Bracco for LVO, EBD and radiology applications.

 

· AI-850 (our reformulation of paclitaxel)or a reformulation of AI-850, if approved for marketing and sale, will alsoface intense competition.  We are awareof companies, such as Abraxis Bioscience (formerly American Pharmaceutical Partners),NeoPharm and Sonus Pharmaceuticals that are applying significant resources andexpertise to developing reformulations of paclitaxel for intravenous delivery.In early 2005, Abraxis Bioscience received FDA approval for and is marketingtheir product. None of these other reformulations has received approval fromFDA. Other companies, such as Cell Therapeutics, are developing new chemicalentities that involve paclitaxel conjugated, or chemically bound, to anotherchemical. None of these new chemical entities have received final approval fromFDA. In addition, a number of companies have developed technology fordelivering hydrophobic drugs. Cardinal Health, CyDex and Elan have createdformulations of hydrophobic drugs that have been approved by FDA.

 

·AI-128, our initial sustained releaseformulation of an inhaled asthma drug, if approved for marketing and sale, willalso face intense competition. Companies such as Alkermes possess technologythat may be suitable for sustained release pulmonary drug delivery and may havecompetitive programs that have not been publicly announced or may decide tobegin such programs in the future. We are not aware of any other companycurrently in human clinical development of a sustained release version of theasthma drug that is currently the subject of our research and developmentefforts. In addition, many asthma drugs are marketed by large pharmaceuticalcompanies with much greater resources than us. These companies may bedeveloping sustained release versions of their asthma drugs that would competewith our sustained release product candidate.

 

Relative to us,most of our competitors have substantially greater capital resources, researchand development staffs, facilities and experience in conducting clinical trialsand obtaining regulatory approvals, as well as in manufacturing and marketingpharmaceutical products. Many of our competitors may achieve productcommercialization or patent protection earlier than we will.  Furthermore, we believe that some of ourcompetitors have used, and may continue to use, litigation to gain acompetitive advantage. Finally, our competitors may use different technologiesor approaches to the development of products similar to the products we areseeking to develop.

 

***We expect todevelop international operations that will expose us to additional businessrisks.***

 

We expect, whetherdirectly or through collaborative relationships, to develop operations outsidethe United States in order to market and distribute our products. Regardless ofthe extent to which we seek to develop these operations ourselves or incollaboration with others, we cannot be sure that our international effortswill be successful. Any expansion into international markets will requireadditional resources and management attention and will subject us to new businessrisks. These risks could lower the prices at which we can sell our products orotherwise have an adverse effect on our operating results. Among the risks webelieve are most likely to affect any international operations are:

 

· different regulatory requirements forapproval of our product candidates;

 

· dependence on local distributors;

 

· longer payment cycles and problems incollecting accounts receivable;

 

· adverse changes in trade and taxregulations;

 

· the absence or significant lack of legalprotection for intellectual property rights;

 

· political and economic instability; and

 

· currency risks.

 

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**Risks Related to Our Industry**

 

***Even if we obtainmarketing approval, our products will be subject to ongoing regulatory review.***

 

If regulatoryapproval of a product is granted, such approval may be subject to limitationson the indicated uses for which the product may be marketed or containrequirements for costly, post-marketing follow-up studies. As to products forwhich marketing approval is obtained, the manufacturer of the product and themanufacturing facilities will be subject to continual review and periodicinspections by FDA and other regulatory authorities. In addition, the labeling,packaging, adverse event reporting, storage, advertising, promotion and recordkeeping related to the product will remain subject to extensive regulatoryrequirements. The subsequent discovery of previously unknown problems with theproduct, manufacturer or facility may result in restrictions on the product orthe manufacturer, including withdrawal of the product from the market. We maybe slow to adapt, or we may never adapt, to changes in existing requirements oradoption of new requirements or policies.

 

If we fail tocomply with applicable regulatory requirements, we may be subject to fines,suspension or withdrawal of regulatory approvals, product recalls, seizure ofproducts, operating restrictions and criminal prosecution.

 

***Market acceptance of our products will be limited if usersof our products are unable to obtain adequate reimbursement from third-partypayors.***

 

Government healthadministration authorities, private health insurers and other organizationsgenerally provide reimbursement for products like our product candidates, andour commercial success will depend in part on these third-party payors agreeingto reimburse providers for the costs of our products. Even if we succeed inbringing any of our proposed products to market, we cannot assure you thatthird-party payors, in the United States, Europe and other markets that we maypursue, will consider our products cost-effective or provide reimbursement inwhole or in part for their use or agree to the proposed price.

 

Significantuncertainty exists as to the reimbursement status of newly approved health careproducts. Each of our product candidates is intended to replace or alterexisting therapies or procedures. These third-party payors may conclude thatour products are less safe, effective or cost-effective than these existingtherapies or procedures. Therefore, third-party payors may not approve ourproducts for reimbursement.

 

If third-partypayors do not approve our products for reimbursement or fail to reimburse themadequately, sales will suffer as some physicians or their patients will opt fora competing product that is approved for reimbursement or is adequatelyreimbursed. Even if third-party payors make reimbursement available, thesepayors’ reimbursement policies may adversely affect the ability of us and ourpotential collaborators to sell our products on a profitable basis.

 

Moreover, thetrend toward managed healthcare in the United States, the growth oforganizations such as health maintenance organizations, and legislativeproposals to reform healthcare and government insurance programs couldsignificantly influence the purchase of healthcare services and products,resulting in lower prices and reduced demand for our products which couldadversely affect our business, financial condition and results of operations.

 

In addition,legislation and regulations affecting the pricing of pharmaceuticals may changein ways adverse to us before or after FDA or other regulatory agencies approveany of our proposed products for marketing. While we cannot predict thelikelihood of any of these legislative or regulatory proposals, if anygovernment or regulatory agencies adopt these proposals they could materiallyadversely affect our business, financial condition and results of operations.

 

***We may be required to defend lawsuits or pay damages inconnection with the alleged or actual harm caused by our products or productcandidates.***

 

We face aninherent business risk of exposure to product liability claims in the eventthat the use of our products is alleged to have resulted in harm to others.This risk exists in clinical trials as well as in commercial distribution. Inaddition, the pharmaceutical and biotechnology industries in general have beensubject to significant medical malpractice litigation. We may incur significantliability if product liability or malpractice lawsuits against us aresuccessful. Furthermore, product liability claims, regardless of their merits,could be costly and divert our management’s attention from other businessconcerns, or adversely affect our reputation and the demand for our products.Although we maintain product liability insurance, we cannot be certain thatthis coverage will be adequate or that it will continue to be available to uson acceptable terms.

 

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***Rapid technologicalchange could make our products obsolete.***

 

Pharmaceuticaltechnologies have undergone rapid and significant change. We expect thatpharmaceutical technologies will continue to develop rapidly. Our future willdepend in large part on our ability to maintain a competitive position withrespect to these technologies. Any compounds, products or processes that wedevelop may become obsolete before we recover any expenses incurred inconnection with their development. Rapid technological change could make ourproducts obsolete, which could materially adversely affect our business,financial condition and results of operations.

 

***Our products involve the use of hazardous materials, and asa result we are exposed to potential liability claims and to costs associatedwith complying with laws regulating hazardous waste.***

 

Our research anddevelopment activities involve the use of hazardous materials, includingchemicals and biological materials. We believe that our procedures for handlinghazardous materials comply with federal and state regulations. However, therecan be no assurance that accidental injury or contamination from thesematerials will not occur. In the event of an accident, we could be held liablefor any damages, which could exceed our available financial resources. Thisliability could materially adversely affect our business, financial conditionand results of operations.

 

We are subject tofederal, state and local laws and regulations governing the use, manufacture,storage, handling and disposal of hazardous materials and waste products, andwe spent approximately $25,000 during the three months ended March 31,2008 to dispose of these hazardous materials and waste products. We may berequired to incur significant costs to comply with environmental laws andregulations in the future that could materially adversely affect our business,financial condition and results of operations.

 

**Risks Related to Our Common Stock**

 

***We expect that ourstock price will fluctuate significantly.***

 

The stock market,particularly in recent years, has experienced significant volatilityparticularly with respect to pharmaceutical and biotechnology stocks. An activepublic market for our common stock may not continue to develop or be sustained.The volatility of pharmaceutical and biotechnology stocks and the level oftrading in such stocks do not always relate to the operating performance of thecompanies represented by such stocks. Factors that could cause this volatilityin the market price of our common stock include:

 

· announcements of the introduction of newproducts by us or our competitors;

 

·announcements of clinical trialresults;

 

·market conditions in thepharmaceutical and biotechnology sectors;

 

·rumors relating to us or ourcompetitors;

 

·litigation or public concern aboutthe safety of our potential products;

 

·our quarterly operating results;

 

·deviations in our operating resultsfrom the estimates of securities analysts;

 

·sales by us of additional shares of our common orpreferred stock; and

 

·FDA or international regulatoryactions.

 

The market priceof our common stock may also fluctuate in response to the exercise by us ofrights under the terms of our 6.5% convertible exchangeable preferred stock.For example, we may elect to automatically convert the preferred stock if ourcommon stock price has exceeded 150% of the conversion price of the preferredstock for at least 20 trading days during a 30-day trading period ending withinfive trading days prior to the notice of automatic conversion. There is a riskof fluctuation in the price of our common stock between the time when we mayfirst elect to automatically convert the preferred stock and the automaticconversion date. These fluctuations may adversely affect the value of ourcommon stock.

 

***If shares under ouruniversal shelf registration statement are issued, then the price of oursecurities may be negatively affected.***

 

We have on file with the SEC auniversal shelf registration statement on Form S-3 (Registration No. 333-134263)and a universal shelf registration statement on Form S-3 (Registration No. 333-123854),which provide for the offer, from time to time, of common stock, preferredstock, debt securities and warrants up to an aggregate remaining availabilityas of March 31, 2008, of approximately $33.5 million and $27.3 million, respectively, net of financingamounts previously executed under these registration statements. The SECdeclared the shelf registration statements effective on August 18, 2006and April 15, 2005, respectively.  In April 2008, the registrationstatement on Form S-3 (Registration No. 333-123854) expired and is no longer available to usfor the sale of securities in a public offering.  In addition, new rules recently adoptedby the SEC currently limit our ability to utilize a shelf registrationstatement to no more than one-third of our unaffiliated public float over anytwelve month period.  Subjectto these 

 

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limitations,market conditions and our capital needs, and to the extent and so long as weare then eligible to use the registration statements under SEC rules, we mayagain seek to use any remaining availability under the shelf registrationstatements by making an offering of securities covered for sale under theregistration statements. In addition, we may amend our shelf registrationstatements or file a new shelf registration statement to increase our potentialaccess to capital. The addition of these securities into the market may bedilutive to existing stockholders and have an adverse effect on the price ofour securities.

 

***Our significantequity holders may have conflicts of interests with us or you in the future.***

 

As of May 5,2008, and based on information provided to us by such entities: the EndowmentCapital Group LLC and its affiliates beneficially own approximately 11% of ouroutstanding common stock; Bank of America Corporation and its affiliatesbeneficially own approximately 6% of our outstanding common stock; BaupostGroup LLC beneficially own approximately 6% of our outstanding common stock;Quaker Capital Management Corporation and its affiliates beneficially ownapproximately 5% of our outstanding common stock; Deutsche Bank AG and itsaffiliates beneficially own approximately 6% of our outstanding common stock;and the Meditor Group Ltd. and its affiliates beneficially own approximately 5%of our outstanding common stock. Collectively these investors will controlapproximately 39% of our outstanding common stock. These investors,particularly if they were to act together as a concentrated group, could exertinfluence over the election of our directors, direct our policies andoperations, including future issuances of common stock or other securities, thepayments of dividends, if any, on our common stock, the incurrence of debt byus, amendments to our Amended and Restated Certificate of Incorporation andAmended and Restated Bylaws and entering into of extraordinary transactions,and their interests, as a concentrated group, may not in all cases be alignedwith your interests. This concentration of ownership among a small number ofinvestors may make it more difficult for other stockholders to influencematters requiring stockholder approval and may have the effect of delaying,preventing or deterring a change in control of our company, thereby possiblydepriving our stockholders of an opportunity to receive a premium for theircommon stock as part of any sale or acquisition.

 

***Our common stock is junior to our preferred stock withrespect to the right to receive payments in the event of a dissolution,liquidation or winding up of Acusphere.***

 

In February 2005,we issued and sold 900,000 shares of our 6.5% convertible exchangeablepreferred stock. As of May 5, 2008, 650,000 of these shares of preferredstock are outstanding. The preferred stock is senior to the common stock as toliquidation. In the event of our voluntary or involuntary dissolution,liquidation or winding up of Acusphere, holders of our preferred stock willreceive a liquidation preference in an amount equal to $50 per share, plus allaccrued and unpaid dividends through the distribution date. Only after holdersof the preferred stock have received their liquidation preference and any accruedand unpaid dividends will we distribute assets, if any are remaining, to ourcommon stock holders.

 

***Acusphere could bethe subject of securities class action litigation due to future stock pricevolatility.***

 

In the past, whenthe market price of a stock has been volatile, holders of that stock have ofteninstituted securities class action litigation against the company that issuedthe stock. The market price of our common stock has been historically volatileand may remain volatile. Such volatility in our stock price could result inshareholder litigation against us.  Ifany of our stockholders brought a lawsuit against us, we could incursubstantial costs defending the lawsuit. The lawsuit could also divert the timeand attention of our management.

 

***Future sales ofcommon stock by our existing stockholders may cause our stock price to fall.***

 

The market priceof our common stock could decline as a result of sales by our existingstockholders of shares of common stock in the market, or the perception thatthese sales could occur. These sales might also make it more difficult for usto sell equity securities at a time and price that we deem appropriate. As of May 5,2008, we have approximately 46,651,883 shares of common stock outstanding and650,000 shares of convertible preferred stock outstanding that are convertibleinto approximately 4.7 million shares of our common stock, plus up to a maximumof approximately 0.4 million additional shares of our common stock issuable atour option in satisfaction of the maximum dividend make-whole payment on theseshares of preferred stock. All of the shares of common stock issuable uponconversion of our preferred stock will be freely tradable without restrictionunder the federal securities laws unless purchased by our affiliates.

 

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***The terms of our outstanding shares of preferred stock mayrestrict our ability to raise additional capital or hamper or prevent anacquisition of us.***

 

In February 2005,we issued and sold 900,000 shares of our 6.5% convertible exchangeablepreferred stock. As of May 5, 2008, 650,000 of these shares of preferredstock are outstanding. In the event of our voluntary or involuntarydissolution, liquidation or winding up of Acusphere, holders of our preferredstock will receive a liquidation preference in an amount equal to $50 pershare, plus all accrued and unpaid dividends through the distribution date.Only after holders of the preferred stock have received their liquidationpreference and any accrued and unpaid dividends will we distribute assets, ifany are remaining, to our common stock holders. Without the vote or consent ofthe holders of at least a majority of the shares of preferred stock, we can notauthorize or sell any equity security that ranks senior to the preferred stockas to dividends or distributions of assets upon liquidation, dissolution orwinding up of Acusphere. As a result of this liquidation preference, it may bedifficult for us to raise additional capital through the sale of common stockor junior preferred stock on acceptable terms, or at all.

 

In addition,without the vote or consent of the holders of at least a majority of the sharesof preferred stock we may not effect a consolidation or merger with anotherentity unless the preferred stock that remains outstanding and its rights,privileges and preferences are unaffected or are converted into or exchangedfor preferred stock of the surviving entity having rights, preferences andlimitations substantially similar, but no less favorable, to the convertiblepreferred stock. This provision could hamper a third party’s acquisition of usor discourage a third party from attempting to acquire control of us via amerger.

 

***Under some circumstances, the holders of our outstandingshares of preferred stock may be entitled to elect some of the directors ofAcusphere.***

 

In February 2005we issued and sold 900,000 shares of our 6.5% convertible exchangeablepreferred stock. As of May 5, 2008, 650,000 of these shares of preferredstock are outstanding. Cumulative dividends accrue on our preferred stock at anannual rate of $3.25 per share, payable quarterly on the first day of March,June, September and December, commencing June 1, 2005. Any dividendsmust be declared by our board of directors and must come from funds that arelegally available for dividend payments. In February 2008, our Board of Directors elected not to declare aquarterly cash dividend that was otherwise payable on March 1, 2008.  This is the first quarterly dividend that hasnot been declared or paid on the preferred stock.  If we have not paid dividends on thepreferred stock in an aggregate amount equal to at least six quarterlydividends whether or not consecutive, we must increase the size of our board ofdirectors by two additional directors. After this time, and for so long asthese dividends remain due and unpaid, holders of the preferred stock, votingseparately as a class with holders of preferred stock ranking on the same basisas to dividends having like voting rights, will be entitled to elect twoadditional directors at any meeting of stockholders at which directors are tobe elected. These directors will be appointed to classes on the board asdetermined by our board of directors. These voting rights will terminate whenwe have declared and either paid or set aside for payment all accrued andunpaid dividends. The terms of office of all directors so elected willterminate immediately upon the termination of these voting rights.

 

***Provisions of Delaware law or our charter documents coulddelay or prevent an acquisition of us, even if the acquisition would bebeneficial to our stockholders, and could make it more difficult for you tochange management.***

 

Provisions ofDelaware law or our charter or by-laws could hamper a third party’s acquisitionof us, or discourage a third party from attempting to acquire control of us.Stockholders who wish to participate in these transactions may not have theopportunity to do so. These provisions could also limit the price thatinvestors might be willing to pay in the future for shares of our common stock.Further, these provisions make it more difficult for stockholders to change thecomposition of our board of directors in any one year.

 

These provisionsinclude:

 

· a provision allowing us to issuepreferred stock with rights senior to those of the common stock without anyfurther vote or action by the holders of the common stock;

 

· the existence of a staggered board ofdirectors in which there are three classes of directors serving staggeredthree-year terms, thus expanding the time required to change the composition ofa majority of directors and potentially discouraging someone from making anacquisition proposal for us;

 

· the by-laws’ requirement thatstockholders provide advance notice when nominating our directors;

 

· the inability of stockholders to convenea stockholders’ meeting without the chairperson of the board, the chiefexecutive officer, the president or a majority of the board of directors firstcalling the meeting; and

 

· the application of Delaware lawprohibiting us from entering into a business combination with the beneficialowner of 15% or more of our outstanding voting stock for a period of threeyears after the 15% or greater owner first reached that level of stockownership, unless we meet specified criteria.

 

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***We have never paid dividends on our common stock, and we donot anticipate paying any cash dividends on our common stock in the foreseeablefuture.***

 

We have paid nocash dividends on our common stock to date and, other than cash dividends paidon our preferred stock, we currently intend to retain our future earnings, ifany, to fund the development and growth of our businesses. In addition, theterms of any future debt or credit facility may preclude us from paying thesedividends. As a result, capital appreciation, if any, of our common stock willbe your sole source of gain for the foreseeable future.

 

***Our common stock may bedelisted from The NASDAQ Global Market, which could negatively impact the priceof our common stock and our ability to access the capital markets.***

 

Our common stock is listed on The NASDAQ Global Market. On January 10,2008, the Company received a letter from The NASDAQ Stock Market LLC (“ NASDAQ”)advising that for the previous 30 consecutive business days, the bid price ofthe Company’s common stock had closed below the minimum $1.00 per sharerequirement for continued inclusion on The NASDAQ Global Market.  If we fail to comply with this minimum bidprice requirement or any other listing standards applicable to issuers listedon The NASDAQ Global Market, our common stock may be delisted from The NASDAQGlobal Market. The delisting of our common stock would significantly affect theability of investors to trade our securities and would significantly negativelyaffect the value and liquidity of our common stock. In addition, the delistingof our common stock could materially adversely affect our ability to raisecapital on terms acceptable to us or at all. Delisting from The NASDAQ GlobalMarket could also have other negative results, including the potential loss ofconfidence by suppliers and employees, the loss of institutional investorinterest and fewer business development opportunities.

 

**ITEM 2. UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

None

 

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

None

 

**ITEM 4. SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

At the Special Meeting ofStockholders held on March 25, 2008, the stockholders approved thefollowing proposal:

 
| ** **                                                                                                                                                                                                                                           | ** ** | **Votes For** | ** ** | **Votes Against** | ** ** | **Abstain** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|-------------|------------|
| Approve the proposed  amendment to the Company’s certificate of incorporation to effect a reverse  split of the Company’s outstanding common stock at a ratio within a range of  1:10 to 1:20, at the discretion of the Board of Directors |       | 40,342,505         |       | 5,477,058              |       | 384,285     |       |

 

**ITEM 5. OTHER INFORMATION**

 

Our policygoverning transactions in its securities by its directors, officers andemployees permits its officers, directors and certain other persons to enterinto trading plans complying with Rule 10b5-1 under the SecuritiesExchange Act of 1934, as amended. We have been advised that, in accordance withRule 10b5-1 and our policy governing transactions in its securities, sucha plan has been entered into with provisions requiring that any trading ofsecurities thereunder is to be reported when and if it occurs inaccordance with applicable law. We undertake no obligation to update or revisethe information provided herein, including for revision or termination of anestablished trading plan.

 

**ITEM 6. EXHIBITS**

 
| **Exhibit********Number** | ** ** | **Exhibit Description**                                                                                       |
|---------------------------|------------|--------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                               |
| 10.1                      |       | Form of  Executive Employment Agreement, as amended, dated on or about  February 4, 2008, by and between |
|                      |       |                                                                                                               |

 

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|   |   | Acusphere, Inc.  and certain executive officers of Acusphere, Inc.(Incorporated by reference to  Exhibit 10.1 to the registrant’s Current Report on Form 8-K, filed  with the Securities and Exchange Commission on February 8, 2008) |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                |
| 10.2*  |   | License  Agreement between Acusphere, Inc, and Cephalon, Inc., dated  March 28, 2008                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                |
| 31.1*  |   | Rule 13a-14(a) /  15d-14(a) Certification                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                |
| 31.2*  |   | Rule 13a-14(a) /  15d-14(a) Certification                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                |
| 32.1*  |   | Section 1350  Certifications                                                                                                                                                                                                                                   |

 

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** filed herewith*

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized on this 8th day of May 2008.

 

 
|     | ACUSPHERE, INC. |
|----------|-----------------|
|     |            |   |
|     | By:             | /s/ Sherri C.  Oberg |
|     |            | Sherri C. Oberg |
|     |            | *President  and Chief Executive Officer* |
|     |            |   |
|     | By:             | /s/ Lawrence A.  Gyenes |
|     |            | Lawrence A.  Gyenes |
| * * | * *        | *Senior  Vice President and Chief Financial Officer* |
|     |            | *(Principal  Financial* *and Accounting Officer and* |
|     |            | *Duly  Authorized Officer)* |

 

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**EXHIBIT INDEX**

 
| **Exhibit********Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                           |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1                      |       | Form of  Executive Employment Agreement, as amended, dated on or about  February 4, 2008, by and between Acusphere, Inc. and certain  executive officers of Acusphere, Inc.(Incorporated by reference to  Exhibit 10.1 to the registrant’s Current Report on Form 8-K, filed  with the Securities and Exchange Commission on February 8, 2008) |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2*                     |       | License  Agreement between Acusphere, Inc, and Cephalon, Inc., dated  March 28, 2008                                                                                                                                                                                                                                                                                         |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.1*                     |       | Rule 13a-14(a) /  15d-14(a) Certification                                                                                                                                                                                                                                                                                                                               |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.2*                     |       | Rule 13a-14(a) /  15d-14(a) Certification                                                                                                                                                                                                                                                                                                                               |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 32.1*                     |       | Section 1350  Certifications                                                                                                                                                                                                                                                                                                                                                      |

 

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** filed herewith*

 

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